“Investors should
look to the future,
not at past returns”

Will the data situation improve if we have uniform standards?

Paetzold: We’re working on this, although there are still some major gaps here. Our team is working with the Massachusetts Institute of Technology (MIT) on a project aimed at promoting the comparability of methods and measurements. Ultimately it will also be up to regulators to ensure that uniform standards are put in place.

It’s said that younger people are more socially aware than older people in how they invest their money. Is this a generational shift?

Lang: The younger generation is an important part of this trend, but not the only driver. We’ve noticed that younger people’s values are a major factor in how they make decisions. These things are often kept separate by the older generation: finance on the one hand, doing good on the other. They keep them separate by donating to charity, for instance.

Paetzold: Most of the capital is still owned by older people. But this is changing. Huge sums of money are currently being passed down from one generation to the next. Since 2015, we’ve been offering training in sustainable investment for wealthy heirs, and 160 younger members of very affluent families have already taken part. They raise awareness among the people they know, influence older members of the family and are given greater leeway in decision-making. More can be done in this respect in a family foundation than with institutional investors, which operate within a restrictive regulatory regime.

Sustainable investment solutions have been around for a while. Why has it taken until now for them to become mainstream?

Lang: I wouldn’t say they’re actually mainstream. If you look at the distribution of invested wealth or the expertise within companies, we’re only part of the way there. You get the feeling that society has reached a kind of tipping point. We know a lot more about how things are inter­connected today and we feel them in a very personal way. For instance, that our clothes are produced in Bangladesh, the glaciers are melting and skiing at lower altitudes won’t be possible as often.

“Sustainability issues should be incorporated into all training courses for financial analysts and economics students.”

Paetzold: Sustainable investment depends a lot on people’s personal attitudes, and requires individual solutions. Everyone needs to find out for himself what’s sustainable. That’s why we need client advisers who take the subject seriously and are willing and able to discuss it with their clients.

There are often two approaches available to choose from: exclusion criteria or the best-in-class approach. What advantages and disadvantages do these approaches have?

Paetzold: These are just two of many approaches that we now use. Both are based on the principle of exclusion. The first excludes entire industries, while the second filters out firms that do badly in assessments. There are four other approaches that can do more: the evalu­ation of a company’s sustainability perform­ance, the exercise of voting rights, the focus on thematic investment such as water and solar energy, and impact investment. Sustainable investment means filtering out the best solution in this toolkit.

Lang: The disadvantage of this excellent toolkit is that you often have to rely on a good provider because using the toolkit requires a lot of expertise and a good database. The advantage is that it can be used to cover not only environmental risks but also financial risks, which these ultim­ately are. That’s hard work, but it leads to better investment decisions.

It’s still difficult for smaller clients to access compelling solutions. Why?

Paetzold: Advisers still constitute a bottleneck.

Lang: Younger people hardly ever go to a bank. Older people often don’t trust their advisers either because they were poorly served in the past. It shouldn’t be difficult to invest sustainably nowadays. That’s exactly why we set up Inyova, including for ourselves, because we had had the same problems as investors.

What could advisers do better?

Paetzold: They must practice. Banks are still not doing nearly enough in this respect. A study last conducted in 2019 showed that on average, client advisers at major banks received just one to three hours of training on sustainable investment – and that would be only once, and often this is only available to new staff. That’s clearly not enough. We’re trying to fill this gap with our training programmes.

Lang: The issue of sustainability should be incorporated into all financial training as a mandatory component. That applies to both financial analysts as well as economics students. Today, a finance professional who can’t talk about sustainability is like an IT specialist who knows nothing about the internet.

Paetzold: Financial analysts who do a CFA do learn about this now. But you can still get a master’s degree in finance from a university without attending a single lecture on climate change.

What role do indices, rating agencies and independent providers of sustainability ratings play in the selection of investments and providers?

Lang: They’re particularly important where you don’t have your own database to rely on. But even providers that have their own researchers buy in expertise. The indexing and research agencies play a very important role. They make a lot of primary data available to us, such as a company’s CO₂ emissions.

Paetzold: One problem is that there are major differences in how this data is collected. This makes them difficult to compare. One interesting aspect is that providers of sustainability ratings are independent of the firms they evaluate. They’re paid by the investors. By contrast, credit-rating agencies receive their fee from the firms that they rate.

Sustainable funds are usually managed actively, which means higher costs. Is the cost argument slowing the boom in sustainable investment with major investors in particular?

Paetzold: Active and passive can be both a blessing and a curse. Ideally in our economic system, capital should be deployed actively, influence should be exerted and voting rights exercised. If all the money is put into passively managed index funds or ETFs and no one exercises their rights, then investors have no influence and this control mechanism ceases to function. On the other hand, these products offer cost advantages that enable a lot of investors to get into the market in the first place.

Lang: Costs are driven down by technology in particular. At Inyova, we’re already selling financial investments with a sustainability impact at the same price as ETFs.

What about the returns? Is sustainable investment attractive?

Lang: The question of whether sustainability means lower returns or brings added value has already been answered. Countless studies have demonstrated that there’s no decline in returns. The opposite hasn’t quite been proven. However, there are plenty of signs that the performance is better. At the end of the day, reliable management of risks and returns is needed for any investment. Ideally, this should be combined with a good sustainability approach.

Paetzold: As an investor, you should look forward, not at past returns. The issues that are important and affect returns lie in the future: the climate crisis, demographic change and new technologies.

“Most of the capital is still owned by older people. But this is changing. Huge sums of money are currently being passed down from one generation to
the next.”

Mr Paetzold, in 2017 you founded the Center for Sustainable Finance and Private Wealth at the University of Zurich. How have the tasks you face evolved since then?

Paetzold: I spent a long time looking for the biggest lever I could find to drive the issue of sustainability forward myself. I first went into banking, then into academic research. In 2015, I co-founded the programme for wealthy private investors at Harvard University, which is currently operated by a team of 20 specialists. We now want to expand that programme with the addition of an offshoot in Singapore, for instance, as well as similar training courses in other Asian countries. We’ve also launched a programme aimed at new tech entrepreneurs. The participants in this include the initial employees of AirBnB, for example, who have now become very wealthy through the IPO. We also try to keep our alumni updated on impact  investing.

Let us look ten years into the future. What role will your institution or your company play then?

Lang: I hope that Inyova will become a major provider of impact investment and that we can help hundreds of thousands of clients enter the market.

Paetzold: I’m not worried. The issue is set to become a major wave, and we’re only at the beginning of exponential growth. At EBS and CSP, we’re right at the forefront. In ten years’ time, a lot more people should benefit from what we’re doing. The next few years will be incredibly important with regard to the climate.

Let’s finish with a personal question: what aspects of your behaviour do you think have the greatest impact on sustainability?

Lang: In my day-to-day life, everything that affects my environmental footprint: avoiding food waste, eating a diet that’s low in meat and travelling less. But I probably have the biggest impact through my job.

Paetzold: The crucial lever is my ‘handprint’, in other words the impact of my work. There are very few people in the world who can actually have an impact. These are the people I try to reach.