Who Defines Sustainability? The Ongoing Debate in Sustainable Investing

As the year approaches its final quarter, many investors are reviewing their portfolios, aiming to strike a balance between financial returns and sustainable values. In Switzerland, tax-efficient personal pension contributions encourage a long-term view, making sustainable investing (SI) particularly relevant. However, aligning investment goals with sustainability principles presents challenges unique to SI.

Within the realm of sustainable investing, many investors experience pressure to allocate exclusively to SI funds, yet some also include non-SI options that better reflect their financial priorities and personal values. It’s common for investors to balance SI investments with traditional funds or to support philanthropic causes aligned with their values.

Sustainability Beyond Investments

Sustainability extends beyond financial investments, influencing consumer choices and career plans. Even with reliable, science-based sustainability labels, personal factors — such as cost, personal beliefs, and income needs — often impact decisions and can sometimes conflict with SI’s rigid definitions. Industries considered unsustainable continue to attract individuals balancing these various personal and financial considerations.

As regulatory standards for sustainable investment tighten, asset owners face dilemmas about whether these evolving definitions meet their expectations for value alignment, impact, and financial returns. Contentious debates persist on issues like whether natural gas should be classified as sustainable or transitional and whether nuclear power and certain security-related investments align with SI principles. While some investors opt for SI-labeled funds, others prefer approaches focused on transition or engagement, which emphasize change but may be overlooked by regulatory frameworks despite being viewed by many as impactful.

One risk of rigid SI definitions lies in their potential to prioritize value alignment over financial returns, possibly alienating asset owners seeking balance. Overly restrictive SI criteria may drive investors to conclude that official definitions do not align with their needs.

Regulators, however, play a critical role in establishing minimum standards and transparency requirements to protect investors, although asset owners still have discretion to make decisions that diverge from regulatory guidelines. Whether current SI definitions will ultimately help achieve the Sustainable Development Goals (SDGs) remains an open question, with time as the final arbiter.

Summary

The latest edition of SI Dilemma explores the complexities of sustainable investing, highlighting the challenges investors face in reconciling personal beliefs with official SI definitions. It delves into the growing tension between prioritizing financial returns and sustainability goals, a conflict intensified by increasingly stringent SI regulations.

Both individual investors and large asset owners encounter these dilemmas, with differing perspectives on what qualifies as sustainable, such as ongoing debates over natural gas and nuclear energy. The need for flexibility in making informed investment choices emerges as a central theme.