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Sustainable investments are becoming the standard - yet the UN Sustainable Development Goals remain out of reach. What's going wrong?

Investors can make a decisive contribution to solving global problems. However, the real economic impact of sustainable investments falls short of their potential, as a research project at the University of Zurich shows. Many sustainable investments do not convincingly demonstrate how they contribute to a better world. To avoid such "greenwashing", we have created an "Investor's Guide to Impact". The focus is always on the actual impact achieved on the real economy.

The UN Sustainable Development Goals (SDGs) provide a global priority list of 17 social and environmental development goals to be achieved by 2030. These include ending hunger and taking effective measures to combat climate change. These goals are ambitious - and costly. Achieving them will require around $2.5 trillion in additional investment each year until 2030.[1] That sounds like a lot of money.

At the same time, the market for sustainable investments is growing fast. Just a few years ago, sustainable investments were considered exotic niche products. Meanwhile, they are advancing to become the industry standard. In Switzerland, around one-third of all fund products are currently classified as sustainable.[2] An important driver is the increasing desire of investors to make a contribution to solving global problems.[3]

Globally, more than $4 trillion already flows into sustainable investments each year - a much larger sum than the investments required to meet the UN Sustainable Development Goals.[4] However, one look at current headlines is enough to see that we are still a long way from meeting the UN goals. Why is the enormous demand for sustainable investments not leading to a similarly large real economic impact?


In a research project, we showed that the impact of sustainable investments is currently limited.[5] We also summarized the results in an "Investors' Guide to Impact."[6]

It is important for investors to keep two key concepts in mind. The first is that the impact of an investment is the change it causes - over and above what would have happened anyway. So, in order to have an impact, something has to change. For example: After I invest in a solar company, it expands its production capacity and thus produces more solar panels. Moreover, this change must be attributable to the investment. This may sound trivial - but this point is often neglected and difficult to prove. The key is to think about what would have happened without the investment in the solar company. Would it have found enough capital on suitable terms to expand its production even without my investment? Only if the answer is no has an impact been achieved.


Central to the understanding of impact mechanisms in sustainable investments is also the second concept: owning impactful companies is not the same as creating impact. In other words, only if you trigger a change in the company with your investment do you achieve "investor impact" (see figure).

In practice, however, investor impact is often mistakenly equated with company impact, i.e. the effect of the company. A current example is provided by a self-titled "impact stock" fund, which invests in publicly traded companies that contribute to achieving the UN Sustainable Development Goals. According to the fund provider, an investment of 10,000 euros leads to a greenhouse gas reduction of 575 kilograms of CO2, which is roughly equivalent to the emissions of a flight from London to Rome and back.

Here, the provider confuses company impact with investor impact. For example, the fund invests in the Danish wind turbine world market leader Vestas. There is no doubt that Vestas achieves a company impact: the wind turbines help to reduce greenhouse gas emissions. But does an investment in the fund also lead to Vestas building more wind turbines? The provider does not have an answer to this question. Based on the current state of research, an investor impact seems rather unlikely here: The purchase of shares in a company of this size is unlikely to have a significant impact on its cost of capital or even on its production capacities.


impact of green and brown companies
Figure 1) Owning impactful companies is not the same as creating impact. For example, investing in a negative impact company and getting it to improve may have more impact than investing in an established "green" company that already has a positive impact.


Based on our research findings, we derive three recommended actions for investors who want to contribute to solving societal problems:

Support the growth of impactful firms in inefficient financial markets to the extent that your risk-bearing capacity allows.

Investors can create impact by providing capital to impactful companies that cannot readily find sufficient funding. This is especially true where financial markets are inefficient: for smaller, young firms and for firms in developing countries. Such investments are not easy to find and can be risky. But that is precisely the point: if a company already has easy access to efficient capital markets, which is usually the case for established companies such as Vestas, an additional supply of capital is unlikely to affect its growth.

When selecting fund managers, it is also worth checking whether they specifically promote the growth of young companies - for example, through their expertise or networks. In addition, it is important to find out to what extent fund managers share the impact focus of companies and are willing to accept trade-offs between profit and impact.

Encourage improvements in established companies.

We found no evidence that buying or selling securities of large companies significantly affects their growth. However, there is clear evidence that investors can encourage established companies to improve business practices. For example, by exercising their voting rights at shareholder meetings ("voting") or by engaging directly with company management ("engagement"). Investors can be represented by service providers such as ISS, Glass Lewis or Hermes, or invest in funds that actively exercise voting rights.

The key to success here is to focus on realistic but significant improvements. It also pays to focus on the companies that show the greatest potential for improvement. For example, the Chinese oil company Sinopec, under pressure from shareholders, introduced measures that have greatly reduced its emissions of the greenhouse gas methane. While the oil Sinopec produces is still a significant contributor to climate change, the methane savings are also substantial: roughly equivalent to the annual greenhouse gas emissions of the Bahamas.

Alternatively, investors can try to stimulate change by selecting their stocks and bonds according to transparent environmental, social, and governance (ESG) criteria. However, the impact of this mechanism has not been clearly demonstrated. What is clear, however, is that excluding companies that do not meet widely accepted best practices (for example, no child labor or no ambitious climate targets) is more likely to lead to improvements than excluding entire industries. To be sure, investors cannot be expected to force a fundamental shift in business models. But they can drive many small improvements and make ESG present in corporate governance.

Talk about your investment decisions. And why you made them.

Sustainable investing can also have an impact that doesn't directly affect companies, but rather the regulatory environment. For example, high-profile signals from investors can support policy or cultural change, especially when like-minded investors join forces. A prominent example is the coal divestment movement, which requires large investors to exclude coal stocks. Initially, such an exclusion simply redistributes coal stocks toward investors who have no problem owning shares in coal companies. It is possible that the divestment movement may even cause publicly traded coal companies to migrate to less transparent private markets. In other words, as long as coal production is profitable, the coal industry will find needed capital, and coal production will continue.

However, if prominent investors, such as the Norwegian Sovereign Wealth Fund, publicly announce the decision to boycott coal, this can influence social discourse and thus have an indirect effect: for example, on the question of whether new coal-fired power plants should be allowed at all. This can give politicians and regulators who advocate a stringent climate policy the necessary backing. Managers in energy companies who are committed to a rapid conversion to renewable energies also receive tailwind from the divestment movement.


If one contrasts these recommendations for action with the aforementioned 4 trillion dollars that flow into sustainable investments each year, it becomes clear why there is still a lot of capital missing to achieve the UN sustainability goals: The majority of the money flows into liquid investment products and thus into securities of established companies in efficient financial markets. Although more and more asset managers are taking up the cause of actively promoting the sustainability goals, Larry Fink, head of Blackrock, the world's largest asset manager, is calling on companies to eliminate their greenhouse gas emissions by 2050. At the same time, large asset managers have mostly voted against more ambitious social and environmental goals at shareholder meetings.[7]

Indeed, asset managers have little incentive to offer high-impact products to their clients. In another study on investor decision-making, we showed: There is a willingness to pay for sustainable investments - but it does not depend on the impact of the investments.[8] Rather, the demand for sustainable investments seems to be driven by positive emotional reactions ("warm glow"). Asset managers thus have an incentive to market "light green" investment products, that is, investments that look sustainable enough to evoke positive emotions but have little impact. This is especially true if impact costs something, for which there are also some indications.[9] Thus, while a market for "light green" investments is likely to improve the satisfaction of many investors and be profitable for asset managers, the financial market as a whole thus falls far short of its impact potential.

According to the Federal Council, the Swiss financial center should make an effective contribution to sustainability.[10] For this to happen, there needs to be a heightened awareness of the impact of sustainable investments. This applies to private investors as well as financial professionals and regulators. A first step in this direction would be a clearer nomenclature: as an investor, one should be able to distinguish between investments that aim to have an impact on the real economy and those that do not.[11] Even better would be sustainability ratings for investment products that include an explicit impact assessment.

The key is to ensure that broad-based demand for sustainable investments has an impact on the real economy. Ensuring this is an important task for the financial sector, policymakers and, not least, academics.

[1] UNCTAD (2014).  World investment report 2014 : investing in the SDGs – an Action Plan
[2] SSF (2020).  Swiss Sustainable Investment Market Study 2020.
[3] 2Dii (2020).  A large majority of Retail Clients want to invest Sustainably.
[4] GSIA (2019).  Global Sustainable Investment Review 2018
[5] Kölbel et al. (2020).  Can Sustainable Investing Save the World? Reviewing the mechanisms of Investor Impact. Organization & Environment, Vo. 33:4
[6] Heeb und Kölbel (2020).  The Investor‘ s Guide to Impact
[7] De Groot et al. (2021). Sustainable Voting Behavior o Asset Managers: Do They Walk the Walk
[8] Heeb et al. (2021).  Do Investors Care About Impact?
[9] Barber et al. (2020).  Impact Investing. Journal of Financial Economics, Vol. 139:1
[10]SIF (2020).  Guidlines Sustainable Finance

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