Sustainable finance is booming – but doing the right thing is often more complex than it seems. In this series, DSI invites professionals to share their perspectives on the tensions, dilemmas and unwritten rules within sustainable finance. Each month, we publish a guest column inspired by the converation starter Between the Lines. What patterns do you see? Where do integrity pitfalls arise? And what does it really take to achieve meaningful change in the financial sector?

By Harald Walkate

In recent years, sustainable investing has taken off. Good news, one would think – savers, investors and pension participants clearly want to contribute to a better world.

At the same time, however, we need to ask what investors are actually achieving. Many assume that their money flows directly into companies doing good for people and planet – enabling those companies to do even more good. In sector jargon, this is known as additionality: the idea that your investment causes something to happen that otherwise wouldn’t. In other words, a direct causal link between your investment and positive impact.

The reality is far more complicated. For at least three reasons: (1) Most sustainable funds invest in listed companies – meaning the money goes to the sellers of shares, not the companies themselves. (2) Many sustainability solutions are not (yet) commercially viable, so listed companies – with profit as their core driver – are often unable to deliver them. (3) Many sustainability challenges are systemic. The idea that we can achieve sustainability by simply adding up small improvements by companies and individuals is flawed. Systemic problems require systemic incentives to discourage harmful behaviour and promote better alternatives. And who creates those incentives? That’s right – governments.

Does that make sustainable funds the next toxic product – promising the world while delivering little, and charging high fees along the way? Not necessarily. It depends entirely on what the consumer believes they’re buying.

There are roughly three types of motivation:

(a) Peace of mind – “I don’t want to invest in ‘bad’ companies – tobacco, weapons, fossil fuels. I know this won’t reduce smoking or end wars, and I accept that returns may be lower, but I don’t want to profit from these industries.”
(b) Outperformance – “I believe companies that perform well on sustainability will deliver better financial returns.”
(c) Additionality – “I invest because my money helps realise solutions that otherwise wouldn’t happen. I want my money to make a real-world difference.”

Can these expectations be met? Based on current research, a very rough answer might be:
(a) – very well
(b) – no
(c) – to a very limited extent

But how much do we actually know about what motivates consumers? Surprisingly little. This is an under-researched area, and it’s not a topic that financial institutions tend to explore with clients.

This is precisely why DSI’s Between the Lines initiative is so timely – and so well named. If we want to understand whether consumers get what they think they’re buying, we first need to understand what they believe they’re buying: is it (a), (b) or (c)? Financial institutions must learn to read between the lines. Simply hearing “I want to invest sustainably” is not enough – we must ask what the client believes this will achieve.

There’s another reason why the title hits the mark. Financial institutions today operate in a world full of sustainability regulations – including the EU’s Sustainable Finance Disclosure Regulation (SFDR), which classifies funds according to sustainability characteristics.

And yet these regulations say little to nothing about whether a fund aligns with motivations (a), (b) or (c). That makes it all the more important for financial institutions to engage in meaningful dialogue with clients – to clarify whether they’re seeking higher returns, peace of mind, or real-world change.

DSI’s efforts to spark this conversation couldn’t be more relevant. If done well, our savings could indeed contribute to solving pressing societal challenges. But that will require an honest conversation – about investor motivations, the trade-offs involved in different investment strategies, and when money truly makes a difference.

About the author

Harald Walkate is a senior advisor on sustainable finance, impact investment and blended finance at Route17. He is affiliated with the Blended Finance Lab at the London School of Economics and a senior fellow at the University of Zurich’s Center for Sustainable Finance & Private Wealth. Harald brings a unique combination of strategic insight and deep expertise in impact investing, SDG finance and climate-related topics. He previously held senior roles in corporate strategy, business development and sustainability at major financial institutions and started his career as a lawyer. He is also an active jazz pianist and composer.