G7 Executive Talk Series

Branded Story / Liechtenstein Bankers Association

Authored by: Simon Tribelhorn

A New Era: More Digital and More Sustainable

Digitalisation and sustainability are currently dominating public debate and will transform the landscape in financial services matters dramatically. We are clearly at the beginning of a new wave of globalisation where cooperation across industries, generations and physical borders will be key in order to overcome the challenges at stake.

Digitalisation is one of the hottest topics nowadays for politicians, the media, companies and the general public. Customers are used to long data availability at all times. Their needs have completely changed as the new digital world has emerged. Already in the past, technology has been a key driver in the financial services sector for decades but digitalization based on new technologies such as cloud computing, big data analytics, artificial intelligence (AI), Distributed Ledger Technology (DLT) including blockchain, offers new dimensions and opportunities that could foster radical change in the financial sector. It is universally agreed that digitalisation will revolutionize the finance world, breaking up value chains and totally altering business models. Digitalisation holds tremendous potential for many financial service providers for increasing efficiency, improving customer relationships and turning services into a customer experience. Regulators are struggling to keep up with the torrid pace of developments. The European Commission has responded to calls to fill the current regulatory gap. Its Fintech action plan published in March this year sets out a range of measures aiming to encourage and simplify the emergence of new solutions and to enable innovative business models to scale up, while increasing cyber-resilience, preserving the integrity of the financial system and helping the financial sector cope with the dramatic change and manage risks.

“Values” regain significance
The other equally highly important issue increasingly occupying the financial sector industry is sustainability. Our society is facing major challenges from an environmental, social, technological and political perspective. After the Paris Climate Agreement and the United Nations’ adoption of the Sustainable Development Goals (SDGs) in 2015 and its 17 goals for sustainable development the discussion on sustainability undoubtedly took on a new dimension. With the SDGs for the first time, combating poverty and sustainable development have been combined in a single agenda. It aims to achieve an all-round improvement of the future of our planet.

“No one shall be left behind,” emphasised the UN Secretary-General Ban Ki-moon.

The holistic dimension of this sustainability approach shows that new ways of thinking and acting are urgently necessary – a compromise between sustainability and development. In this context and nearly in parallel with the FinTech Action Plan, the European Commission presented its strategy for a more sustainable financial system, outlining the need for roughly 180 billion euros in additional investment in the EU alone to meet the agreed climate targets.

PWC has estimated the global annual investment required to meet the SDGs at a hefty 7 trillion US dollars. However, the true test is yet to come – implementation. The UN can only achieve these goals if all play their part: states, businesses, local communities, each individual. Governments are currently only spending one-seventh of this amount, most of which will have to come from the private sector.

To overcome the diverse challenges be it in social or ecological matters, we not only need a strong political system, but also businesses which act sustainably and make their own contribution with structural changes and technological innovations. We must all fulfill our responsibilities to a sustainable future.

In this process, the financial sector has significant responsibilities, and an important role in the necessary transformation and when allocating capital.

A question of allocation
The mobilisation of private wealth is crucially important for reaching the sustainability goals. According to Deutsche Bank, the global wealth of private households amounted to a total of USD 250 trillion in 2015. Juxtaposed with this figure, the Brookings Institution expects that USD 5 to 7 trillion will be needed each year to finance the SDGs. The assets managed worldwide by institutional investors such as pension schemes, investment funds, insurers, etc, are about USD 83 trillion according to OECD estimates.

Both investments of private wealth and investments by institutional investors tend to have a long-term orientation, as do the sustainability goals themselves. Both could accordingly be employed worldwide to end hunger, ensure education, promote health, secure access to affordable and clean energy, support innovation and infrastructure projects, and fund climate protection. Sufficient capital is available; it is merely a question of the right allocation.

The majority of institutional investors are convinced that sustainable investments increase risk-adjusted yield. Sustainable investments are increasingly important for private investors. However, there are still constraints preventing relevant investment entities and private investors from integrating sustainability factors in their investment decision-making. In order to further disseminate sustainable investments, we need to raise awareness and acceptance of the fact that environmental and social returns do not mean renouncing economic returns. This erroneous belief is still rooted in the minds of investors and product providers – even though numerous studies have shown that sustainable investments even lead to better financial returns in the long run.

The mobilisation of private wealth is crucially important for reaching the sustainability goals. According to Deutsche Bank, the global wealth of private households amounted to a total of USD 250 trillion in 2015.

Next-Gen plays an important role
Considering that 460 billionaires will be leaving some 2.1 trillion in wealth to the next generation within the next 20 years, it is clear that the evolution of financial sector toward greater sustainability requires great responsibility, not only on the part of financial intermediaries as creators and brokers of sustainable investment products but also among ‘high-net worth individuals’ (HNWIs), particularly of the younger generation. For that generation is less motivated by material wealth, being more driven by values and interest in changing the environment and society for the better. It is the same generation for whom use of digital technologies is a matter of course in everyday life. Digitalisation and sustainability are thus more than just trends, they are issue complexes which the financial firms absolutely have to come to grips with to survive in the marketplace in the longer term. Neither is more pertinent than the other, for both will be substantially determining the industry agenda over the next several years.

This demonstrates that there is a need for action, information and education. The financial industry plays an essential role in this regard. It is apparent that to overcome these obstacles leadership at the top of every financial institution is needed, driving the change and accepting responsibility – for ourselves and for future generations. The ongoing digitalisation opens up new opportunities to tackle all these issues, be it having correct data available, everywhere at anytime, be it new educational tools and working models, but also to reach out to new generation clients via innovative channels.

Seize doesn’t matter
The example of Liechtenstein – a financial centre in the heart of Europe with an international orientation – shows that small national economies can make an important contribution to reaching the SDGs, as well as to stability and sustainability in general. With its 38,000 inhabitants, Liechtenstein offers the institutional framework for sustainable development: economic growth at a high level, low CO2 emissions, fast unbureaucratic channels to allow capable and adaptable behaviour. With these indicators alone, Liechtenstein has an advantage over larger economies in terms of initiating and realising sustainability. With its balanced, debt-free national budget and a AAA country rating Liechtenstein is one of the most stable global countries. The country has proven to be a reliable partner to the international community over the years. This can be seen in its participation in exchange of information, effective measures against money laundering and terrorist financing, and implementation of international regulations. All this demonstrates that Liechtenstein is a small country that acts sustainably. With more than 1,300 non-profit foundations and many years of experience and expertise in wealth management, the Liechtenstein financial centre has the ideal preconditions for accepting a significant role in the responsible investments of assets and thus to serve as an important bridge between investors who want to invest their money in a meaningful way and the existing financing gap for sustainable investment.

Simon Tribelhorn, is CEO of the Liechtenstein Bankers Association.