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Financial advisors at banks are increasingly forced by regulation to advise their clients on sustainability. But the answer to the question of what a sustainable investment actually is is not clear to many. In the 1970s, it was often answered by defining what it is not, namely an investment in companies whose business is morally sinful: Weapons manufacturers, cigarette makers or liquor distillers. This focus on ethically motivated exclusion criteria shaped the first generation of sustainable investment and is still present today.
After the turn of the millennium, the so-called ESG criteria were developed, which today can be described as the mainstream of sustainable investing. There was a growing understanding that environmental and social developments such as climate change and population growth have an increasing influence on the business activities of companies. Thus, for institutional investors, the integration of financially relevant, material ESG factors became a fiduciary duty. That the ESG approach falls short is evident from the fact that more and more private clients who care about the impact of their investment criticise it as insufficient.
Double Materiality
The financial industry must therefore go a step further in the direction of impact investing. Here, the double materiality is at the centre of the considerations, where not only the relevance of ESG factors for the business activity is considered, but also the impact of the business activity on the environment and society.
The seventeen UN Sustainable Development Goals (SDGs), which represent the global community's roadmap to a sustainable future, are suitable as a guiding principle. The question must be answered: What does my money contribute to achieving these seventeen goals, which range from poverty reduction to peacebuilding, by 2030? For most banks, the focus on this impact-oriented form of sustainable investing is still far away. But if they do not follow this trend, they are likely to lose customers. Because with the Millennials and Generation Z, two generations are coming into the best investor age who are not only digital natives, but also sustainability natives. For them, doing banking transactions on their smartphones is as natural as expecting the bank to invest their money profitably and in a way that will benefit future generations.
«The seventeen goals of the UN are suitable as a guiding principle.»
They are the first generations to grow up knowing that their future depends on the decisions and investments they make today. Many traditional commercial banks see this development as a fundamental threat. Not only have they slept through the technological change, but because of multiple conflicts of interest, they are also part of the problem rather than part of the solution in terms of the sustainable development of our planet. Accordingly, their heads are deeply stuck in the sand.
Forum for a Community
This development offers a unique opportunity to redefine customer relationships and revolutionise banking. A bank that meets the demands and expectations of its increasingly sustainability-conscious and digitally savvy clientele can be more than "just" a bank. It can become a personal advisor for sustainable financial and life issues. It can be a forum for a community that conveys know-how on sustainability and promotes the dialogue that is urgently needed to preserve the world as a place worth living in the long term.
The conclusion is clear: Sustainable Investing must be understood as an opportunity. As an opportunity to make room for radical new ideas. With the aim of using one's own capital in such a way that it works for oneself and also benefits as many others as possible.
This article was originally published in "Finanz und Wirtschaft" on March 25th, 2023.
