Sustainable investments are on the rise, but does impact follow? A new CSP report urges private banks to gear up their services to meet investor demands — and environmental targets
Much has changed — for the better — is one of the key takeaways of the freshly published CSP report on the sustainable investing capabilities of private banks. Despite leaps in investment options, the report finds that mainstreaming sustainable investing with real-world impact remains a far off target. The researchers urge private banks to systematically ask clients about their sustainability interests, to ramp up the training of client advisors, and to offer products with measurable impact. This is what clients want, policymakers expect, and environmental agreements demand.
The third edition of the Sustainable Investing Capabilities of Private Banks report maps the competence of private banks in sustainable investing by looking at their vision, offering, and services. The report is published by the Center for Sustainable Finance and Private Wealth (CSP) at the University of Zurich and includes banks such as UBS, Credit Suisse, and PNB Paribas.
“The trends documented this year are surprisingly similar to the ones we noted last year, and banks are focusing on developing their products and increasing their offerings. But even though we see an increase in the number of dedicated sustainable investing funds, the development of processes, such as client engagement or impact reporting, lags far behind,” Taeun Kwon, the lead researcher of the report and the Head of Wealth Manager Programs at CSP highlights.
ESG integration increasingly mainstream — measuring impact still taking shape
In comparison to 2018, the average number of dedicated sustainable investing funds offered by each individual bank increased from 30 to 58. The report finds that banks are actively developing better offerings by putting together entire portfolios consisting of sustainable investments only. Yet, the amount of assets deployed in sustainable investing is still a fraction - median of 2.8% - of the total assets under management of the participating banks.
While developing offerings is a step in the right direction, having more client assets in sustainable investing and actually creating sustainable growth requires more than that, the researcher notes. The integration of environmental, societal and governance (ESG) factors into investment processes is increasingly mainstream, yet offering investments with measurable real-world impact is only taking shape.
“Banks struggle to bridge the gap between promoting investments with high ESG scores and actually showcasing the impact or change made through these investments. To demonstrate impact, banks should put serious effort into thinking of shareholder voting and engagement. In practice, thinking of ways shareholders can ensure that the values guiding their investments are taken into account in all decision-making related to their investments.”
A key bottleneck in deploying more assets into sustainable investments can be traced to the capacity and know-how of relationship managers and investment advisors. Much like last year, the report underscored the limited number of training opportunities for client-facing employees and noted that only a third of all participating banks have mandatory training on sustainable investing for their client-facing employees. Even when such trainings are in place, they tend to take only 1–3 hours.
That the lack of training opportunities is a reflection of the fact that sustainable investing is still far from accounting as a strategic management priority, the researcher notes.
International agreements call for action — not reaction
This year’s report also includes a chapter on the regulatory changes taking place across Europe due to the Action Plan on Financing Sustainable Growth released by the European Commission. In addition, the final chapter looks at private banking and its alignment to Internationally Agreed Environmental Goals, such as the Paris Agreement.
“Other financial organizations are increasingly active in aligning their activities and processes with new policies and agreements,” Kwon says. “But there is very little talk about private banks taking a proactive approach and looking at international environmental goals and asking what they could do to support their clients and the broader society in meeting these goals.”
The report leaves no doubt about the pivotal role of private banks in mobilizing wealth towards sustainable development and the work done to reach climate targets.
“The demand for sustainable investments with real-world impact is growing. This is what our work with wealth owners underscores. The market is already there,” Kwon concludes.
Key findings from the report include:
Sustainable investing offerings improve. In comparison to 2018, banks’ offerings improved in range and depth. The average number of dedicated sustainable investment funds of participating banks rose from 30 to 58. Almost all banks have a dedicated discretionary SI mandate, and ESG integration has developed and become more refined. This trend is expected to continue due to market demand and the intensification of competition.
Interest in active ownership increases — but is far from what it should be. Shareholder voting and engagement is increasingly becoming the norm within the investment industry. Despite a clear trend, the report found insufficient focus from private banks in selecting fund managers that engage and vote, especially on sustainability factors. The report noted the increasing use of shareholder engagement as an impact investing strategy and underscored engagement as a mechanism through which investors can demonstrate measurable impact, especially at scale.
Clients’ expectations for sustainable investing services remain unmet. Similar to 2018, the training and support that client-facing employees received still falls short in relation to what clients expect. Reporting on sustainability beyond financial measures remains underdeveloped in more than half of the participating banks. In most cases, sustainability reporting was limited to a simple look through ESG ratings and lacks a detailed assessment of the impacts of the investment and the modes supporting investors' engagement.
EU Action Plan on Financing Sustainable Growth will impact the entire financial industry — private banks included. Aspects of investment processes and decision-making that will gain weight include disclosing climate risks to clients. Asking clients about their ESG preferences and integrating these preferences into investment processes will also pose a challenge to the private banking industry.
Private banks fail to proactively implement changes to meet international environmental goals. The focus of private banks tends to be on portfolio-based climate risk exposure rather than the alignment with international climate goals. Banks repeatedly described going beyond portfolio risk assessment as complex and challenging. Yet, in order to align with international climate goals and mitigate the impacts of a climate crisis, banks need to take a proactive approach that looks at banking activities as a whole.
Read the full report: Sustainable Investing Capabilities of Private Banks
Do you want to hear more about the report directly from the researchers?
Join us for the report launch in Zurich on Tuesday the 5th of November. Register by sending an email to anna.tervahartiala@bf.uzh.ch.
For further reading and information, we recommend:
IMPACT INVESTING: Mapping families’ interests and activities
Study from the University of Zurich and The ImPact on market gaps and the role of financial intermediaries.
Taeun Kwon’s interview on SibosTV on millennial investors and the importance of the ESG (Environmental, Social and Governance) funds market.
Can Sustainable Investing Save the World?
An academic article on sustainable investing and investor impact.
