Insights from EHL’s first Sustainable Investing Forum where new sustainable finance initiatives were discussed. The event brought together leading academic researchers and practitioners to create a platform to foster fruitful exchanges and reflect on robust approaches to pursue applicable sustainable investment strategies.
The notion of sustainability is not new, but awareness of environmental and social issues has grown enormously in recent years. Increasingly extreme climatic hazards, the consequences of pollution, and the simple aspiration to live in a healthy environment all contribute to this trend.
The finance industry, which for a long time seemed impervious to such considerations, is now taking an interest. Admittedly, there are considerable differences between Europe and the USA in this respect, and, more generally, it's not always easy to distinguish sincere, impactful initiatives from mere "greenwashing". Against this backdrop, the first Sustainable Investing Forum (SIF), organized by EHL Hospitality Business School and Asteria IM, was held on June 6th, 2023, on EHL campus Lausanne. This article's title and the forum's objective align with Schumpeter's quote: “We always plan too much and always think too little”.
Here are the event’s key points:
1. Equity portfolio: Sustainability is achievable
Today, it is possible to build a “net zero” equity portfolio, i.e. a portfolio aligned with the climate objectives of the Paris Agreement. Guillaume Levannier (Science Po Paris, Lombard Odier) stresses that it is crucial to base the portfolio on appropriate data, i.e., forward-looking (companies' projected emissions trajectories), objective (not based solely on company disclosures) and comprehensive (taking into account scopes 1, 2 and 3). One way to achieve a net-zero portfolio more easily is to allocate a significant proportion to investments linked to so-called "ice cube" activities (where companies in high-emitting sectors are quickly reducing their carbon emissions).
2. Bond portfolio: Sustainability is (partly) achievable
Building a “net zero” government bond portfolio is more difficult and costly. However, Eric Jondeau (HEC Lausanne & SFI) shows that it is possible to achieve a portfolio whose performance remains in line with the benchmark and which enables emissions to be reduced by around 25%. Currently, a trade-off exists between reducing carbon emissions and maintaining a low active share. Overall, balancing emission reduction with portfolio performance requires careful management and compromises.
3. Good performers are more resilient
Companies that place greater emphasis on Corporate Social Responsibility (CSR) are more resilient in times of crisis. Ana Mão de Ferro (UZH & SFI) shows this is particularly true in the inflationary context experienced since the end of the pandemic. This may be explained by the fact that these firms can better maintain the confidence of their various stakeholders.
4. Good performers benefit from a premium
Today, there is a premium for environmentally friendly companies. In her presentation, Emanuela Benincasa (UZH & SFI) uses the term “greenium”. She also points out that this premium rewards companies that go beyond greenwashing and are genuinely aligned with the Green Bond Principles (GBP).
5. The impact of finance on the real economy has to be strengthened
A panel discussion (Bettina Kallenbach (Holcim), Jean-Christophe Van Tilborgh (Retraites Populaires), Jean-Pierre Danthine (E4S) and Natacha Guerdat (Moderator, Asteria IM)) addressed the question of the concrete impact of financial initiatives on the real economy.
The importance of a regulatory environment that drives decarbonization and incentivizes sustainable practices, such as the EU ETS trading system, was highlighted.
Finance has a crucial role to play in the transition to a net-zero economy, providing funding and support to firms actively making the transition, especially small innovative firms. Keeping in mind that returns, risk and fees are important, carbon footprints can be reduced without sacrificing performance.
However, the impact of net-zero portfolios on the real economy has so far been limited. Finance could have a greater impact by identifying new leaders, fostering innovation and actively engaging with companies. Panelists noted that collaboration and collective engagement are more potent than individual engagement activities. Divestment or exclusion should be a last resort.
6. Commitment to teaching and further training
The organization of this event at EHL Hospitality Business School demonstrates the commitment of this academic institution to sustainability. These issues are already widely integrated into the curriculum of its Bachelor and Master programs, including Finance and Portfolio Management courses.
The trend is widespread. For example, the CFA (Chartered Financial Analyst) Institute, a leader in professional training in finance, recognizes the growing importance of Environmental, Social & Governance (ESG) issues and has incorporated them into its curriculum. Dimitri Senik (CFA Institute) points out that ESG content in the CFA program has increased from 7% to 16% and that in 2019 they launched a certificate fully dedicated to ESG investing.
Are sustainable investments worth it?
This first EHL Sustainable Investing Forum has provided valuable insights. Throughout the presentations and collaborative networking, we witnessed that the growing awareness among investors is equally matched by interest from the academic world. Academic endeavours can contribute to the advancement of sustainable investing by exploring and testing investment strategies driving positive environmental and social outcomes.
Strengthening research and portfolio management dialogue has never been as crucial as today. With climate objectives and regulations increasing on the asset owner side, fundamental outcomes need to be tested and addressed in an applicable way.
The collaboration with practitioners will help forge a more sustainable finance industry, contributing to more sustainable and inclusive finance strategies.