Why the University of Zurich launched an initiative for sustainable finance

There has been a backlash in sustainable finance, especially in the U.S. Can you explain why?

This is largely based on a fundamental misunderstanding of what sustainable finance—or ESG, as it’s also called—is about. And the misunderstanding is that there’s this idea that if you incorporate these ESG aspects you can do it for “values” reasons or for “value” reasons. So “values” reasons are incorporating societal aspects, for example, because you want to achieve some ethical, moral, political outcome. While the “value” perspective is about understanding that ESG is about risks. So ESG risks, like climate risks, biodiversity risks, are risks that are to be incorporated in the investment process. So the backlash comes because of this misunderstanding and this idea that it’s about “values.” But it’s rather the opposite, it’s about “value.”

The University of Zurich launched an initiative in sustainable finance. Why did it do that?

There are multiple reasons why we have set up this initiative. One reason is definitely to communicate more clearly to the outside what ESG is about and what fundamental research we at the university have been undertaking in that specific space, because it turns out that this is one of the biggest hubs that we have in Europe and worldwide in terms of researchers working on sustainable finance topics. But more broadly, it’s also about providing a fundamental research base for the Swiss financial marketplace. So if you think about pharmacology and biotechnology, there’s a very clear
understanding that if a country wants to be on the cutting-edge in terms of the sectors, becoming leaders globally, then there needs to be fundamental research in those areas to support business development. And exactly the same applies to sustainable finance. If Switzerland wants to be a leader in the world of sustainable finance—and that’s the ambition—you need to have fundamental, high-quality research supporting that ambition.

You also aim to build bridges between academia, industry, society, and policymakers. How will you do that?

A key challenge that academics always face is communicating their results to the outside. And this is very important because universities are not ivory towers. What we do here has a fundamental impact on society. Let me just illustrate what I mean with an example: We’ve done some research recently illustrating that the biodiversity impact of companies, the negative impact on biodiversity, is actually priced in financial markets. That means investors are asking for a risk premium when investing in stocks that negatively impact biodiversity. And this is a very fundamental result because next to climate change, biodiversity loss is one of the very big challenges that we all face. And this is an important result that should not stay within an ivory tower.

So what you’re doing is more communicating rather than collaborating with the other stakeholders?

Certainly it’s both elements. One element is communicating to the outside [world] all of the great work that is being conducted here at the university, because a lot of the results should not stay in what is not an ivory tower but should be communicated, because many of the results are actually of high practical relevance. But absolutely it’s also about collaborating. It’s about having a platform, where academics, policymakers, and practitioners come together, exchange in this independent environment at the university their views on ESG and sustainable finance topics.

The initiative research is clustered around four focus areas: “Financial Institutions and Sustainability”, “Artificial Intelligence and Sustainable Finance”, “Private Wealth and Sustainable Investing”, as well as “Climate Biodiversity Finance”. Let’s talk about AI: How can it play a role in sustainable finance?

AI affects everything. It’s actually like sustainable finance. So just to illustrate, one example is that you can use AI technology to better digest, read, and understand text documents. For example, we are doing work using AI to better understand whether certain disclosures of some companies are greenwashed or are not greenwashed, and so the power of AI helps us to better understand, read, and interpret these documents. But also in other areas. So let me give an example: A big challenge that we’re all facing is data. In order to incorporate ESG issues like climate risks, we need data on how exposed companies are to climate risks. And there’s a lot of great work certainly from the ESG rating providers, but some of this data is very expensive, especially for universities, also for some investors that are increasingly worried about the costs of these ratings. So therefore universities can offer a service by using AI, and we do this in this project in order to kind of measure how exposed firms are to climate risks. And what we do concretely is study conference calls, earning conference calls, where management and analysts come together to discuss pressing issues of the companies. And we’re essentially using AI technology to automatically read these transcripts of these calls and measure whether in these calls companies are discussing climate risks— whether it’s physical risks, regulatory risks, whether it’s about upsides or downsides—and we’re making these measures available to the industry but also to academics to use this data as an alternative to ESG ratings.

The first sustainable products in Switzerland were launched as early as 1980, making the Swiss Financial Centre a pioneer in the field. When we look at it now, where is it relative to the other financial centres?

The competition at the moment in terms of financial marketplaces becoming leaders in sustainable finance is enormous, and governments around the world are putting a lot of money into this competition. For example, by supporting the universities. Think of what Singapore is doing and other places in Asia. So I think Switzerland is doing very well, it’s on the way, and I should also say my professorship, which is in sustainable finance, is pretty much the first professorship in the world dedicated specifically to sustainable finance. There are some other places, also in Geneva that go in similar directions, but it’s something new, and it’s based on this understanding, also in Switzerland, that you need to have a base, an academic base, providing fundamental research on the topic if you want to sustain in this competition. So this is a very good sign. And that coupled with the fact that Switzerland is just a powerhouse in terms of money because of all the money managed by Swiss institutions. So Switzerland has a key in this transformation and the key is the money. And if we use the power of the insights from academic research combined with the insights from the financial sector and how to make the world a better place, then capitalism really can be a catalyst to address the big challenges we are facing—biodiversity loss, climate change. So therefore I’m very hopeful that Swiss financial power can positively contribute to this change.

The Department of Finance of the University of Zurich found that many private wealth holders are very interested in sustainable finance, but they and their financial advisers lack knowledge when it comes to the mechanics of sustainable finance. So do you see an improvement there? And if not, what recommendations can you give them or for policymakers?

There’s a huge demand for education. And that’s why colleagues here have launched the Centre for Sustainable Finance for private wealth, which has been very successful and provides lots of training to high net-worth individuals that want to make an impact through their investing. Therefore this is a great sign. It’s certainly going in the right direction. Now if you ask me, where is more to be done? I think more is to be done in terms of engagement. Not just in primarily private individuals but by institutional investors. We know—and I’ve done some work on this—that engagement by investors on climate issues, for example vis-a-vis portfolio firms, generates positive outcomes. For example, we show it reduces financial risks. If you engage a company, downside risk [and] tail risk—that the stock price crashes—goes down. Plus, it also helps the environment, because these firms that are successfully engaged are creating less damage to the environment. So it’s both of these sides: There’s financial interest if you engage, and there’s a benefit for society. This is certainly an area where I plead for more investors to actively engage portfolio companies, either individually or through platforms, and there are platforms available, for example in Switzerland.