Why sustainability is a priority for investors: the role of sovereign institutions

COVID-19 has provided further impetus to the global sustainable agenda. Among policy makers the awareness of the need to act in the area of climate risk has increased with more countries – recently the UK and the US under President-elected Biden – setting ambitious goals in terms of reduction in carbon emissions. The corporate sector is also moving fast on climate change and other sustainable issues with an increasing number of companies reporting on climate-related information according to the standards issued by the Task Force on Climate-related Financial Disclosures (TCFD).The financial sector has also advanced in this area. Asset managers and financial institutions have started incorporating sustainability into their investment strategies and the number of sustainable investment strategies targeted have increased dramatically over the last few years. The demand for such strategies among institutional and wholesale investors has increased substantially with flows into sustainable investing vehicles and mandates rising very fast.

In the related first panel discussion “Why sustainability is a priority for investors: the role of sovereign institutions” which you can watch in full in our video library, UBS Chairman Axel A. Weber outlined how dynamics in the financial industry are shifting towards climate protection, using UBS data as an example which is seeing substantial flows into sustainable products and mandates. He highlighted the UBS paper recently published on the occasion of the WEF event which outlined the key themes of impact investing as key driver for a new wave of growth in sustainable finance, and a move towards investor engagement on sustainability which might even surpass regulation as key driver for companies to adopt sustainable strategies. As key measure to address climate change, he suggests the introduction of price-based mechanisms centered around a single price for carbon, coupled with the creation of offset markets to manage the transition to a green economy. On the role that central banks can play he noted that central banks need to take into account their primary mandate which is to preserve price stability and policy implementation needs to be in line with the principle of market neutrality.

Andréa M. Maechler, Member of the Governing Board, Swiss National Bank (SNB), outlined how the SNB integrates ESG in its investment portfolio by applying a clear exclusion policy in order for the SNB balance sheet to reflect the fundamental values and norms of Switzerland. This includes the exclusion of companies that produce condemned weapons, seriously violate fundamental human rights or systematically cause severe damage to the environment. She also echoed the comments made by Axel Weber concerning the limitations that central banks face in “greening”  their portfolio as a result of liquidity requirements and market neutrality.

Luiz Pereira, Deputy General Manager, Bank for International Settlements (BIS), made the point that while there is no “silver bullet” that allows central banks alone to mitigate climate change, “Green Swans” are a new type of systemic risk that can directly undermine central banks in fulfilling their mandates of financial, price and macroeconomic stability due to their tipping-point characteristics. Central Banks should therefore be active in raising awareness of these issues, coordinate mitigation and adaptation policies, strengthen taxonomies and standard setting and lead by example via ownership of green assets in their reserves and pension funds. Central banks can contribute by enhancing more policy coordination, for mitigation and adaptation to climate change-related risks. They can stress the importance of financing the transition, help coordinate financial markets, fiscal authorities and relevant international bodies