Association column: A financial product is not a fridge

Aspirations to establish a label for sustainable financial products for transparency reasons are promising. But only if it is implemented correctly. By Adrian Schatzmann, CEO of the Asset Management Association Switzerland.

It seems impossible to imagine life without them: For nearly 20 years, electricity-consuming household products such as refrigerators or washing machines have been labelled with the coloured energy label. Dark green stands for the best energy efficiency, dark red for power guzzlers.

The label is an internationally used, certified seal of quality and has the purpose of providing transparent information on electricity consumption. On the one hand, it simplifies the purchase decision. On the other, it is supposed to encourage manufacturers to build more climate-friendly appliances.

The “greenwashing” headlines have made it clear to us financial market players that comparable and meaningful key figures are needed in the rapidly growing universe of sustainable financial products. Transparency and credibility towards investors are key. At the same time, the financial sector must pursue its commitment to contribute to climate protection with the utmost seriousness.

In Switzerland the government is planning to introduce a quality label for sustainable investment products before the end of the year. What – at first glance – could be more obvious than to label financial products with climate compatibility indicators, such as a carbon footprint and a temperature index, similar to the coloured label on refrigerators? This would make it clear to investors which climate compatibility class an investment portfolio or fund falls into. Is it in line with the Paris Climate Agreement and does it slow down global warming to 1.5 degrees Celsius? Or do the activities of the companies that are included in the product lead to global warming of 2.5 or even 3.5 degrees?

At first glance, the idea of such a label seems appealing. But orientation on refrigerators and washing machines is the wrong way to go. A refrigerator is a static product with a fixed electricity consumption. Investing, on the other hand, is a dynamic process. The climate compatibility of funds and portfolios changes accordingly. The potential exclusion of companies with high carbon emissions from a fund would please sustainability investors at first glance. But it would hardly benefit the climate.

An example: Swiss commodities giant Glencore has decided to stick to its coal business and yet reduce its carbon emissions to zero by the year 2050. Glencore is currently still unattractive in terms of climate compatibility, but a complete exit from the coal business would change this.

It is companies like Glencore with presently huge carbon footprints that will play a crucial role for achieving the goal of a net-zero economy. What does this mean for a label? The climate impact indicators of an investment product must be forward-looking, dynamically oriented and focus on change – as opposed to just measuring the current footprint. A corresponding analysis procedure requires reliable and complete data. The demands on the forecasting ability of analysts are complex, as they must continuously check the company-specific mitigation path of a company in relation to its investment activity. At the same time, the information must be understandable and comprehensible for investors. If this can be successfully implemented in line with international developments, a well-desgined label could – once again – indeed help clients with their purchase decisions and incentivise asset managers in their product strategies.

© 2022 funds europe

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