Sustaina­bility costs money

This interview was conducted in 2021

• What does sustainability really have to do with money?

  Sustainability costs money. I think that’s a good way to sum it up.
  
  We all know what money is. But what exactly sustainability is, is a bit more complicated. In very general terms, it means meeting the needs of people now without causing a risk that future generations will no longer be able to meet their needs.
  
  There are lots of aspects to this: for example, global challenges like climate change and scarcity of resources. Then we have the Sustainable Development Goals of the United Nations’ 2030 Agenda, which aim to protect the environment, reduce social inequality, and achieve sustainable growth. But how can we actually do all this? We are going to need technological development and innovation, first and foremost in the fields of clean energy production, mobility, disposal and supply. Innovation like this calls for high levels of investment. Because, as I said, sustainability costs money.

• And how can I tell whether an investment is sustainable?

  At the moment, that’s still difficult. We currently do not have a standard definition of what the threshold is for labeling companies or business activities as sustainable. We do now have the first legal guidelines to tell us what makes a sustainable financial product. But the assessment used depends very much on the values system applied – one clear example of this is the classification of nuclear energy as “green”.
  
  The European Union has also noted that there are flaws in the system used for labeling sustainable financial products. To remedy this, it has launched the action plan on financing sustainable growth. This action plan encompasses activities such as the EU Taxonomy Regulation, which aims to achieve a uniform understanding of green economic activities. Then we have the disclosures regulation, which obligates investors to provide transparent reports on the extent to which sustainability aspects are taken into account in specific financial products.
  
  And we can also think about what else we can do. The EU says that sustainability labels could help shed light on the matter, particularly for small-scale investors.

• Do established sustainability labels already exist?

  Yes. For example, there is the FNG label for specific financial products, developed by the German Sustainable Investment Forum (Forum Nachhaltige Geldanlagen). Universität Hamburg’s Sustainable Finance Research Group provides expert support and management for the label, which is considered the quality standard for sustainable investment in the German-speaking world.

• This type of official sustainability label has not yet become standard, though. How can investors distinguish between sustainable investments and greenwashing?

  That is still a difficult question. If we are to avoid greenwashing of investment products, we need transparency so that we can check any statements and claims made.
  
  I already mentioned the EU action plan and the reporting obligations. This means that we are making huge progress. The action plan also aims to strengthen sustainability reporting. Large publicly listed companies in the EU are already legally required to report on sustainability topics that are relevant to them. A draft bill was published in April 2021 aiming to extend this reporting requirement. Essentially, the EU is trying to increase transparency and to standardize reporting systems and formats. This is the only way to check and compare targets, data, and companies, and to limit greenwashing.

• Does this mean that if a financial product is promoted as “green” but has no specific label, we should be skeptical?

  That is not necessarily the case, but it does mean that particular due diligence is necessary for investors and that they should investigate the fund for themselves. I would definitely recommend that small-scale investors who want their investments to be sustainable look for these labels. I would also advise everyone to look very carefully at which products they want to buy. You can look, for example, at whether the company has incorporated sustainability into its strategy and whether its management is concerned about the issue. Another good idea is to look at whether the company has drawn up relevant targets and measures and whether it monitors achievement of these targets. It is also important to ensure that companies provide transparent reporting on whether the targets are achieved and if not, why not. That involves a lot of effort, which is why labels are very helpful for small-scale investors.

• Another important question is, do sustainable investments make money?

  Opinions are strongly divided on that question, especially in the academic community, which has looked at the topic in great detail. The predominant picture that we have gained from meta studies, which are studies that collate the results of thousands of smaller studies, is that there is a positive correlation between sustainable investments and returns.
  
  However, the differing definitions of sustainability make this sort of analysis difficult. As I said before, everyone interprets sustainability differently and the factors used to measure the sustainability of a company also vary greatly. This means that the results are different depending on which study is based on which data.
  
  But to give you a short answer to your question, yes, sustainable investments do make money. I also think that they are a key step towards a more sustainable world, and the only way that we can fund the essential transformation of our economy.