"In sustainable investments, quality and impact orientation are in focus."

Interview with Prof. Dr. Julian Kölbel, Assistant Professor at the Center for Financial Services Innovation, University of St. Gallen

The FSI is a center that specializes in interdisciplinary research and teaching surrounding the topic of financial services. Altogether, we have seven professors based at different schools, ranging from finance and management to law and computer science. We gain scientific knowledge and together make it accessible to students and decision-makers.

I'm seeing a trend reversal in terms of growth and a more intense focus on quality and impact orientation. While sustainable financial investments have been growing very sharply over recent years, this trend has now leveled off. This is partly due to the fact that investors are stricter in terms of what they regard as sustainable. I see this as a positive development; it means that clients have become more critical and that providers can only win over investors with clearly positioned products.

There is also an Atlantic rift opening up. Whereas, in Europe, sustainability and hence sustainable investing are widely accepted, the USA has seen a maelstrom of polarization. This creates problems for international financial institutions and means communication has become a lot more cautious. However, this doesn’t change the fact that sustainability problems must be addressed urgently.

In Switzerland, the financial sector has been given one last chance to self-regulate. As such, the reins are somewhat looser in Switzerland compared to other countries, but they are still likely to be tightened. Greenwashing is a highly emotive subject as it’s associated with deception and hypocrisy. It’s also an attractive issue for the media; no newspaper is going to pass on the opportunity to reveal any dishonest sustainability efforts of banks.

Nevertheless, greenwashing is difficult to pin down. Only in the rarest of cases does it involve deliberate deception, which is already prohibited anyway. Typically, greenwashing occurs when vague details relating to sustainability are coupled with emotive communication. For clients, this then creates an impression that gives them a clear conscience but doesn’t actually correspond with the facts. In the end, there’s disappointment when it’s revealed that the product is not what you’d hoped it would be. This problem can be solved by an easily understandable and science-based label.

There are two problems. One is that sustainability is a concept that is similar to fairness. It’s impossible to measure sustainability exactly, and there will always be different opinions and interpretations. This means that better standards will not spell the end for further discussions. The definition of sustainable must constantly be under review. The second problem is that there is a lack of reliable underlying data. This gives rise to disagreement not only over the interpretation, but also the facts, which creates difficulties. I would therefore make the case for a relatively simple but mandatory disclosure standard, as this would make dependable data available for the most important indicators. Unfortunately, there is currently competition between different standards, which wastes a lot of energy.

I probably underestimate the possible applications of AI because I still can’t picture how it will evolve. At the moment, AI makes it possible to evaluate text data efficiently, such as with RepRisk, for example. As well as looking at reports that companies produce about themselves, you can also look at what the media and internet is writing about companies. This means you get a highly insightful outside perspective, as it captures what society views as relevant in that moment. The use of AI will make this kind of analysis work a lot more efficiently.