Christian, if you look at the growth of sustainable investing over the past years: what do you think were the drivers?

Environmental, Social and Governance topics have been around for a long time. However, it required some catalyst events to bring them to the attention of investors on a broader scale. From an investor perspective it does not help if you see a development or an irrationality in the markets first, but remain the only one to do so, because other investors do not follow. Or to use the words of John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.”

Which were such catalyst events?

With regard to Governance, the scandal around Enron in 2001 certainly brought this topic to investors’ attention.

Environmental risks such as extreme weather, floodings and the likes have become more apparent in the public consciousness over recent years and have also become dominant in the World Economic Forums’ Global Risk reports since 2016. In 2021, 4 out of the 5 top risks are related to the environment – the other being infectious diseases related to the present pandemic. For the broader public, initiatives like “Fridays for Future” also helped.

Social factors can be more and more seen as part of social megatrends such as globalization, urbanization, inequality and wealth creation as well as changes to work, family structures, demographics, health & longevity – just to name a few.

So ESG is coming more and more to the forefront of investors’ attention?

Yes. What also helps is the changing perception that accounting for ESG factors in your investments is solely for risk mitigation and comes at the cost of reduced returns or yield. As investors but also consumers, customers, governments and other stakeholders become aware of the topics, ESG also starts to create opportunities to generate higher returns.

Marcello Solida

ESG investing has now reached broader attention.

Christian Reuss, Head SIX Swiss Exchange

Taking all these developments together, ESG investing has now reached the broader investor attention. And given the importance of the topic I think it will grow further – although there are still significant challenges.

What are these challenges?

Most and foremost there are currently no globally accepted standards to what defines “ESG” in an investment context. As such you see different initiatives emphasizing different elements of ESG in different ways. One example are “ESG Ratings”: There are several providers and methodologies resulting in one company obtaining a very strong and a very weak rating at the same time.

This divergence is currently analyzed by investors and there are several studies that try to link performance to the different ratings. While we might assume that the market will find its way here over time, challenges like “Greenwashing” are more detrimental. In the absence of standards or coordinated criteria this is difficult to challenge or identify.

What does “Greenwashing” mean?

“Greenwashing” describes the over- or misrepresentation of an investment portfolio as “green” or “sustainable”. This may be done on purpose or unintentionally, but either way it harms the credibility and hence the overall adoption of ESG factors into the investment process. This is one area which regulators have noticed and may intervene at some point.

Greenwashing harms the credibility of ESG factors.

Finally, a key challenge is the standardization of disclosures across companies. The ESG factors are manifold across industry and partly company-specific. Luckily, there is some development in this area driven by industry organizations and governments.

Could you give as some examples?

In Switzerland, a few months ago the Federal Department of Finance was instructed by the Federal Council to prepare a consultation draft for a future mandatory climate reporting regime. This draft is expected by summer 2022 and would affect large Swiss companies, listed and unlisted, and includes banks and insurance companies with 500 or more employees, more than CHF 40 million in turnover or more than CHF 20 million in total assets.

Furthermore, FINMA, the Swiss Financial Market Supervisory Authority, requires financial institutions to describe the key elements of their governance structure in relation to climate-related financial risks and their process for identifying, assessing and managing climate-related financial risks.

What are the benefits and disadvantages?

While at first glance these are additional regulatory burdens for companies, it also helps to standardize the required disclosure regarding ESG to investors, rating agencies and other stakeholders, thereby creating some efficiencies by making comparisons easier. Of course, such sustainability-related regulations are not just being developed in Switzerland, but in multiple jurisdictions.

Examples are the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB), which provides recommendations for climate-related financial disclosure, or the UN Sustainable Stock Exchanges initiative with its mission to provide a global platform for exploring how exchanges can enhance performance on ESG issues and encourage sustainable investment, including the financing of the UN Sustainable Development Goals. All these positive developments help to create standards that are used across jurisdictions.

You mentioned stock exchanges in the ESG context. What would you say is their role?

As an exchange, we’re the market place where issuers and investors come together. Regarding ESG disclosures, we support the inclusion of important and future-oriented ESG related factors in our markets. But while we cannot influence the direction capital flows take and hence what is traded on our market, we can help to create transparency around ESG factors. This can be done by supporting issuers in creating standardized ESG disclosure measures which meet investors’ demand or by increasing the visibility of sustainable investments. 

As an exchange, we can help to create transparency around ESG factors.

While we already offer several flags in the Bonds segment that indicate whether an investment is “sustainable”, creating disclosure recommendations to issuers is a more challenging task. It requires coordination across jurisdictions and most importantly, this has to be done jointly with our issuers and aligned to legal obligations.

This may take a while, but I am convinced that such a set of ESG disclosure recommendation would be a major contribution that stock exchanges can make to support capital markets with the wider and more efficient adoption of ESG in the future. As a member of the UN Sustainable Stock Exchanges initiative we show our commitment in this space in order to contribute and benefit from the existing expertise regarding potential standardization measures across jurisdictions.

How do these efforts fit in with those of SIX and its other Business Units?

It is a logical extension of what we are already doing: enabling a sustainable future is part of the mission statement of SIX. Since 2015, we have been pursuing a corporate responsibility strategy with various initiatives that have focused on three action areas: the contribution of SIX to the stability and attractiveness of the financial center, responsibility of SIX as an employer and our contribution to society and the protection of the environment.

SIX is also already participating in a number of industry initiatives and national and international working groups. It is a member of the Global Reporting Initiative since 2013 and reports according to the GRI standards since 2016. SIX is also member of Swiss Sustainable Finance, which aims to inform on best practice and creating supportive frameworks and tools to support its members, and it supports the Zurich Energy Model which entails the commitment to improve energy efficiency and the Advance network for “Gender Equality in Business”.

But I’d say that the “sweet spot” among the sustainability efforts of SIX is the urban honey produced by the bees on the roof of our main building in Zurich-West since 2017. The annual harvests are auctioned among employees and the proceeds donated to the Swiss Mellifera Bees Society.

Dear Christian, many thanks for this interview!