Getting rid of oil heating, reducing meat consumption, taking the train more often instead of flying – many people consider these personal lifestyle changes particularly effective, according to a survey. But what makes the world more sustainable the fastest? Our investments, our invested money – most people significantly underestimate this lever. They also fail to recognize that they are already investors – with their retirement money in the AHV and pension funds. In Switzerland, the total managed financial assets amount to over 8000 billion Swiss francs, which is ten times the Swiss gross domestic product. Quite a lot of money, a pretty big lever – one would think.
Sustainability is Not a Black-and-White Concept
This wealth still largely flows into companies that are not sustainable. Only 11 percent of the assets in publicly accessible Swiss funds are sustainably invested. An analysis by the climate tool PACTA shows that in 2020, up to five percent of the assets managed by Swiss financial institutions were still promoting oil, gas, and coal mining. This includes private savings deposits in banks, insurance premiums, or pension fund money.
You might be wondering: How can I invest sustainably? We will explore this together in this series. Studies show that women, in particular, could accelerate the sustainable transition. 92 percent of women find sustainable investing important. Responsible and environmentally friendly business practices are generally more important to them than to men. The few women at the top of the business world also care more about the environment. Companies with more female executives are both more environmentally friendly and socially responsible.
But first, a question that may seem simple but is tricky needs to be answered: What does sustainability mean, and how is it measured? "Living not at the expense of future generations": This is how the United Nations has defined sustainable development. Sustainability goes beyond environmental protection. It also includes other requirements for a humane future, such as economic well-being or social security.
What Are the ESG Criteria?
The principle of sustainability is also reflected in the so-called ESG criteria. They refer to three areas:
- E (Environmental) – Environment
- S (Social) – Social
- G (Governance) – Responsible corporate governance
The ESG criteria assess the sustainability of companies. They have become the most important standard in the sustainability jungle. With these three letters E, S, and G, verifiable criteria are established. The "E – Environmental" considers topics such as pollution or water consumption. The "S – Social" includes topics such as the well-being of employees or the diversity of the workforce. The "G – Governance" encompasses issues such as corruption or risk management.
Does ESG Set Uniform Standards?
One might think that ESG sets standards for everyone. But there are no uniform requirements yet for how companies must measure and report their ESG data. Therefore, investors often rely on rating agencies (such as MSCI, Sustainalytics, or ISS Oekom), which award companies points for sustainable business practices. However, a study by MIT shows that the ratings of the agencies vary greatly, depending on how they measure and weight issues. For example, the well-being of a company's employees can be calculated differently depending on whether the turnover rate of employees or the number of labor law complaints against the company is used as a metric. A company can thus be top-rated by one agency and flop-rated by another.
Especially in the areas of "Social" and "Governance," there is often a lack of uniform metrics. For instance, how do you measure whether a company takes the health protection of its employees seriously? Whether the teams are diverse and the company is women- and family-friendly? There is still much to be done in the S and G areas. The situation looks somewhat better for environmental criteria. Since the Paris Climate Agreement came into force in 2016, many companies have been defining concrete climate goals that are clearly measurable. Or are they?
How Can Climate Goals Be Measured?
Is a company operating in a climate-friendly manner? Experts measure this by greenhouse gas emissions or their CO₂ footprint. How does this work? Emissions, i.e., CO₂ output, are divided into so-called scopes.
The greenhouse gas protocol distinguishes between Scope 1, 2, and 3 emissions.
Scope 1 includes emissions that are directly controlled and managed by a company.
Scope 2 includes emissions indirectly caused by a company through purchased energy. For example, this includes electricity used in product production.
Scope 3 includes indirect emissions within the value chain. These are emissions that are caused upstream or downstream when a final product is created. This is colloquially referred to as gray energy, which the company itself can hardly influence. For example, a company that processes raw materials but does not extract them itself is credited with the emissions from raw material extraction in Scope 3. These Scope 3 emissions are very difficult to measure and hardly available, but they are actually crucial to presenting a company's overall climate balance.
But is the amount of greenhouse gas emissions alone sufficient to assess a company's climate compatibility? Among Swiss companies, Roche is considered one of the biggest climate offenders when only the absolute output is considered. However, if this is put in relation to the revenue achieved, Roche appears far behind in the ranking. Per dollar of revenue achieved, cement manufacturer Lafarge Holcim emits the most greenhouse gases. This principle is called "Carbon Intensity."
These examples show that even ecological criteria are not as clearly measurable as financial figures, for example. And that the topic of sustainability has only been present in the financial world for a few years. These approaches are therefore an important step in the right direction. Because without data, change is not possible.
How Does the EU Taxonomy Create Uniform Standards?
The European Union has also recognized this. Therefore, it has created the EU Taxonomy, a regulatory framework that has been gradually coming into force since January 2022. This is a catalog of criteria that creates European standards and evaluates all economic activities based on how ecological they are. The EU Taxonomy also includes a directive on how companies should report sustainability information in the future.
Europe is Gradually Standardizing the E in ESG Criteria
This allows investors to better assess how sustainably a company is really operating. However, at present, the taxonomy only covers ecological sustainability, i.e., the E. It will take some time before there is a comprehensive regulatory framework that includes all economic activities and all forms of sustainability, i.e., also the S and G. Whether Switzerland will adopt the rules of the EU taxonomy is still unclear. At least initial signposts are emerging to help navigate the sustainability jungle.
