Liechtenstein, one of Europe's smallest countries, demonstrates that a principality of only 38,000 inhabitants can make a real contribution to reaching the SDGs. Liechtenstein offers an institutional framework for sustainable development and economic growth at a high level.
In May 2018 the EU Commission laid out its first set of concrete proposals for a sustainable financial system that supports and reinforces the commitments made during the 2015 Paris Climate Agreement. It is estimated that €180 billion of additional investments a year will be required for Europe to meet its ambitious 2030 goals, which includes a 40 per cent cut in greenhouse gas emissions.
Climate change has already caused catastrophic physical and economic damage across the globe and rigorous rule setting to prevent further loss is critical. In 2017 catastrophe-related losses covered by insurance reached an all-time high of €110 billion. Some commentators would go so far as to argue that, if climate change is not dealt with now, many of today's investments could become entirely redundant.
What is the EU Proposing?
The EU's plan aims to motivate the routing of more investment into sustainable economic activities. Defining what constitutes a socially and environmentally sustainable activity was an initial hurdle. 'Greenwashing', that is, classifying unsuitable products as sustainable was a concern and has been facilitated by differences in existing rules. The Commission therefore decided to create a harmonised, EU-wide taxonomy which will be embedded into EU law and will help investors to identify which investments genuinely contribute to sustainable development and value creation in economic, environmental and social terms, and which don't. In practice this means that new standards and labels will be attached to sustainable financial products which have met the criteria (green bonds and green funds as examples).
The proposed regulation will additionally introduce consistency and clarity on how institutional investors can integrate environmental, social and governance (ESG) factors in their investment decision-making processes. Delegated Acts under the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive will be amended to integrate ESG considerations as well.
How can the Financial Sector Support the EU Initiative?
To overcome the challenges posed by climate change, not only does there need to be a strong political system, but businesses must also act sustainably and make their own contribution with technological innovations and structural changes. The financial sector has an important role to play in this process, supporting the necessary transformation and the allocation of capital. PWC has estimated the global annual investment required to meet the 17 Sustainable Development Goals (SDGs) at a hefty US$7 trillion. However, the true test is yet to come – implementation. Governments are currently only spending one-seventh of this amount. The remainder will have to come from the private sector.
The mobilisation of private wealth is vitally important if sustainability targets are to be met. According to UBS, the private wealth market amounted to a total of USD 250 trillion in 2015. The assets managed worldwide by institutional investors such as pension schemes, investment funds, insurers, etc., are about USD 83 trillion according to OECD estimates.
Investments by institutional investors and investments of private wealth tend to have a long-term orientation, as do the sustainability goals. Both could therefore be harnessed to end hunger, promote health, ensure education, support innovation and infrastructure projects, secure access to affordable and clean energy and fund climate protection.
Enough capital is available; it is merely a question of allocating it correctly.
Most institutional investors are convinced that sustainable investments increase risk-adjusted returns. Meanwhile, sustainable investments are increasingly important for private investors. Nevertheless, there are still a number of factors stopping private investors and relevant investment entities from integrating sustainability factors in their investment decision-making. It is important to underline and raise awareness of the fact that environmental and social returns do not necessarily mean renounced profits. This mistaken belief is still rooted in the minds of many investors and product providers – even though countless studies have shown that sustainable investments can in fact lead to better long-term financial returns.
Millennials' New Responsibility
Within the next two decades, 460 billionaires will hand over approximately US$2.1 trillion in wealth to the next generation. It is evident that the evolution of the financial sector towards greater sustainability requires great responsibility, not only on the part of financial intermediaries as creators and brokers of sustainable investment products, but also among younger high-net worth individuals (HNWIs).
Statistics have shown that today's millennials (those aged between 22 and 37) are less motivated by material wealth, being more driven by values and an interest in changing the environment and society for the better. This gives us hope for a more positive future, however financial firms must remain in step with a rapidly changing culture. This also includes keeping abreast of the latest financial technologies which, alongside sustainability will determine the industry agenda over the coming years.
More Leaders That Think Long-Term
Taking a slapdash approach to generate short-term returns can prove damaging in a number of ways longer-term. It is important that leaders across financial institutions create sustainable and resilient business models and encourage a sound corporate culture that promotes responsible investing. This change can only be driven from the top and will involve hiring the right people and giving time and resources to advance sustainable growth. To move the industry forward it will be important to integrate long-term thinking in evaluating investment opportunities and to partner with clients who are incentivised to do the same.
All Contributions Count
Liechtenstein, one of Europe's smallest countries, demonstrates that a principality of only 38,000 inhabitants can make a real contribution to reaching the SDGs. Liechtenstein offers an institutional framework for sustainable development and economic growth at a high level. The jurisdiction prides itself on its low CO2 emissions, its fast 'unbureaucratic' channels and the capable and adaptable teams of professionals propping up its strong financial services sector. With its balanced, debt-free national budget and a AAA country rating, Liechtenstein is one of the world's most stable countries and has proven itself to be a reliable partner to the international community over the years. This can be seen in its effective measures against money laundering and terrorist financing, its participation in exchange of information, and in the jurisdiction's keen implementation of international regulations. With more than 1,300 non-profit foundations and many years of experience in wealth management, the Liechtenstein financial centre has the ideal preconditions for taking on a significant role in the responsible investments of assets. Liechtenstein aims to serve as an important bridge between the existing financing gap for sustainable investment and investors who want to invest their money meaningfully.
Keeping Pace with Digitalisation
In today’s information age the global spread of digitalisation is inevitable and accommodating and being reactive to technological change is what is set to differentiate the industry leaders from the followers. Customers are used to 24/7 data availability, and as a result, their needs have completely changed – and are continually evolving.
Technology has of course been a key driver in the financial services sector for decades but what we are witnessing presently is revolutionary. Cloud computing, big data analytics and artificial intelligence are taking on a shape of their own, quite literally in the case of machine learning – and we have already seen the arrival of robo-advisors, for example. But what these advances in technology truly have the capacity to do is improve and streamline the customer front-end to the behind-the-scene processes and compliance procedures.
Distributed ledger technology (DLT), including blockchain also offers new dimensions and opportunities that could foster radical change. It is universally agreed that digitalisation will break up value chains and totally alter existing business models. For financial service providers digitalisation offers the potential to improve their customer relationships and turn services into a customer experience.
Regulators are, however, struggling to keep up with the current pace of change. While often less regulation is sought in certain areas, there is a push for clear rules affording legal and planning certainty to be created within the digital market. The European Commission has responded to calls to fill the existing regulatory gap. In March, the Commission published its 23-step ‘Fintech action plan’ setting out a range of measures aimed at encouraging and facilitating the emergence of new solutions that will allow innovative businesses to scale up, while increasing cyber-resilience, preserving the integrity of the financial system and helping the financial sector manage dramatic change and risks.
Within the current context, the General Data Protection Regulation (GDPR), aimed at protecting citizens’ data within the European Single Market, regardless of where the data is processed, comes at an opportune time. The financial sector, which has a long history of looking after the security of people’s assets now has the opportunity to further build and deepen that trust through their careful handling of client data. This will require a review of the related managerial structures and operational processes, as well as the implementation of effective data governance.