It’s fascinating to see who’s been using the term “sustainability” and “sustainable investment” recently. Even protagonists who, just five years ago, I could never have imagined doing so – such as Black Rock. Better late than never, you might think.
But just as many fund managers, companies and banks still have a lot of catching-up to do here, the same is true of potential investors. So while 64% of German investors have expressed an interest in making sustainable investments, most of them only have a rudimentary knowledge of what’s involved. This is why it’s so important for investment advisers to start by familiarising themselves with the underlying issues so they can pass on the relevant knowledge to their clients in ways that match their needs.
Sustainability means only using or consuming as many resources as can subsequently be recovered, reclaimed or regenerated. Or from a financier’s perspective: living off the interest rather than the capital. This is a very emotive issue that doesn’t just focus on green assets. It would be truer to say that sustainability is defined and supported by three parameters or pillars: ecology, society and economy. Indeed, “pillars” is the best image here, in that the “roof” of sustainable development can only protect the underlying “house” if the pillars supporting the roof are equally legitimate, equally resilient and equally well-developed.
The first pillar, ecology, defined as a viable biosphere, forms the basis of a good life for all of us (including non-humans). This means ensuring that we maintain the Earth’s status as a planet where it is both possible and desirable to live. In times of climate change and rising sea levels, this has become dramatically more important for the many people whose living space is at risk of sinking beneath the waves.
The second pillar is global social justice, so finding a balance between north and south, rich and poor, old and young, and even people of the same age. This means dealing with highly controversial issues on a global scale, such as Chinese fishing fleets harvesting Africa’s fish stocks to make the fish meal which we then feed to our farmed salmon. This pillar also covers child labour, exploitation, slavery and many other such issues.
The third pillar is the economy which – and this may surprise you – also plays an important role, albeit with certain conditions attached. The aim is to achieve long-term, successful economic development that makes it possible to satisfy human needs within an intact ecology and a peaceful society. And this is where it becomes absolutely clear that all three of these pillars are interdependent rather than mutually exclusive. We can only achieve and implement them all together, as a single whole.
There’s nothing new about these objectives. The issue of sustainability has been under discussion since the Club of Rome first reported on the predicament of mankind and published the resulting book, “The Limits to Growth”, in 1972. Until around 2010, interest in sustainable development remained very high; it was regularly discussed by customers, providers and advisers at events such as the Green Money Fair and the Sustainability Congress in Bonn. Since then, however, it’s become clear that general interest in sustainable investment has declined.
Demand only started to rise again when lawmakers, prompted by new EU directives, decided to make advice on sustainable financial investment mandatory. Although somewhat delayed by the intrusion of the coronavirus pandemic, the relevant provisions have since passed into law. It remains for us to hope that the whole issue of sustainability will be regarded as just as important by financial advisers as it is – thanks to MiFID rules – by lawyers, tax specialists, portfolio managers and real-world economists. Again, there is no friction here between sustainability and the investor’s magic triangle – yield, safety, liquidity – because these concepts are not mutually exclusive. Quite the opposite: rather than conflicting with these three goals, sustainability is their foundation and starting point. Future investment will only make sense once we fully acknowledge this.
Frankfurt School covers sustainable investment in seminars and continuing education programmes on financial consultancy and financial planning, and will be focusing intensely on the issues involved at the 19th Financial Planner Days event.