Is sustainable finance becoming mainstream?

The Swiss newspaper Le Temps published a very interesting article on June 20 by Emmanuel Garessus on the topic of sustainable finance.

Based on a study published by Morgan Stanley the day before, sustainable investments worldwide reached a total amount of 22’800 billion dollars, and can no longer be considered a niche market. This means that a quarter of total investments made by professionals are following ESG (environmental, social and governance) criteria.

The annual growth rate of sustainable investments currently amounts to 11.9 % and continues to grow.

The majority of institutional investors, such as pension funds, foundations, insurance companies and sovereign funds, are now investing in this field, which used to be a niche a few years ago. Hedge funds are an exception to this trend.

Europe (12’000 billion dollars) and the United States (8’800 billion dollars) are major players in this field. Theme wise, climate change occupies the top position, ahead of inclusive growth and gender diversity.

Risk mitigation and potential return on investment are the main reasons why professionals invest in sustainable finance.

When I read the article in Le Temps, I had mixed feelings. On the one hand, it is very encouraging to see how quickly sustainable investments are increasing all over the world. On the other, we should remain aware that there are different levels of commitment from investors with regards to sustainable investments. A first level is exclusion (we just choose not to invest in the tobacco industry or in casinos, e.g.). A second level is the so-called “Best in class” approach where we decide to invest in company A instead of company B, because the former one has a better rating according to ESG criteria, even if we invest in non-renewable energy sources. The third level is impact investing where we select companies, which bring a real progress to the world, by addressing environmental or social issues and contributing to reach the UN SDGs (Sustainable Development Goals).

Unfortunately, the article doesn’t give any indication on the way the total amount of sustainable investment is shared between these different levels.

My personal opinion on this topic is that a shift towards more progressive and impactful levels of sustainable investments is as important as the total amount of these investments.

For that reason, the world needs more and more finance professionals with a solid background in sustainability, both at investing companies or institutions and at rating companies.

Philippe Du Pasquier, President of the Board

The Great Decline of the Swiss Franc

The Tough Years

The consensus among financial analysts during last 6-7 years is that the Swiss currency has been significantly overvalued and still is. Historically, EUR100 could be converted into more than CHF120, but in spring 2015, there was a remarkable currency movement and the Franc raised to unprecedented levels. Much at the joy of Swiss consumers traveling and purchasing abroad, but at the same time causing even more serious problems for Swiss companies and institutions having to increase their prices with up to 20% for clients abroad.

At the time, the Swiss National Bank was very aware of the issues a strong Swiss Franc would cause to exporting business and visitors to Switzerland, and therefore for a long time tempted to keep the EUR-CHF exchange rate above 1.20 (EUR1 = CHF1.20). To achieve this goal the Swiss National Bank sold CHF against EUR and also lowered interest rates, making it less attractive to change your money into Francs and to invest money here. The pressure however was big and too many foreign companies and investors continued to purchase Swiss Francs. In spring 2015, in an abrupt move, the Swiss National Bank went away from the first part of their strategy and stopped selling Francs to defend a level of 1.20. The reaction in financial markets was immediate, and the Swiss Franc went straight up and stabilized at level of EUR1 = 1CHF, even though the short-term interest rates at the same time were dropped to -0.75% (you actually received money if you took a loan in CHF) as a last desperate measure to park money in the Swiss mountains. 2015 and 2016 were tough years for many exporting companies. When a currency jumps by 20% overnight this translates into 20% more expensive prices of your goods when sold abroad and 20% higher costs on all goods and services bought outside Switzerland. Sales went down, margins went down, salaries were cut. Misery in short.

The Swiss Franc Is Becoming Cheaper

Few things – other than diamonds – last forever. Slowly since 2015, negative interest rates have helped equilibrate the Franc back into a downward trend. As can be seen on the graph below, the Swiss Franc has gradually gone down since, and is now after four years of continuous weakening coming back down and through the important threshold of 1.20. Analysts at UBS predict that the trend is not over, but will continue and in the shorter term already reach a level of 1.25. A tendency the president of the Swiss National Bank, Thomas Jordan, welcomes. He sees no reason to discontinue the decline by adjusting monetary policy. This is good and a fine guarantee for a continued depreciation of the Franc.

The great decline of the Swiss Franc is good news for Swiss exporting companies and visitors coming to Switzerland. In line with a weaker CHF companies can raise their export prices. It is also great news for future and current students at BSL who, through the new currency reality, get a 20% (soon to be 25%) discount compared to spring 2015!

A consequence of the weakening Franc is that interest rates are increased into positive territory. The opinion of the international financial sector is still that the Swiss Franc even today still is too strong. This and the fact that near-term risk appetite for equity investments is high – as the world economies are growing at a satisfying pace – will keep the CHF low and push it even lower.  

I welcome the trend and we hope for all of us that the next level will be 1.30 (EUR1 = CHF1.30). Breaking that threshold would certainly be bad news for Swiss consumers, having to pay higher prices for imported goods. However, given the dependency of Switzerland on exports (pharmaceuticals, machinery, clocks and chemicals), the country currently is, in my opinion, better off with an even weaker currency.

 

Author:

Dr. Jan Erik Meidell, Professor