“Pecunia non olet” (money does not smell), is a well-known Latin saying. Can the same be said of returns? The investor has to become active if he wants to achieve a “clean” or sustainable return. We clarify important outstanding issues about sustainability and offer our own solution. All OLZ funds have been sustainable since 2017.
Why has sustainable investment suddenly become a trend?
Since 2007 the sum of sustainably managed assets in Switzerland has in-creased by more than tenfold from 32.8 billion to 390.6 billion Swiss francs (Swiss Sustainable Finance Market Study 2018). Institutional in-vestors, namely pension funds and insurances, are clearly responsible for this current strong growth. Some act on their own conviction, others due to external pressure: en-vironmental organisations, media, politics, and increasingly, the beneficiaries themselves, who demand that the pension schemes make an active contribution to an ecologically and socially
“Since 2007 sustainably managed assets in Switzerland have increased by more than tenfold .”
What exactly does sustainable investing mean?
The fact that no valid global defi-nition of sustainability exists, is a significant challenge. Region-al and cultural differences also play a role to a certain extent. However, there is one common denominator in the ESG crite-ria – environmental, social and governance principles. OLZ ap-plies MSCI data and research, ensuring global coverage. The MSCI ESG rating for equities and bonds serve as the basic criteria when considering sustainability in the investment process.
Does the market ensure “clean” returns?
If that were the case, there would be no need for specific sustainable investment products. Unfortunately, the market alone does not ensure “clean” returns, i. e. it does not differentiate between more or less sustainable investments. Shares belonging to companies, which do not fulfill the basic sustainable criteria, are not automatically punished with a markdown or lower returns. Consequently, sustainable investment does not necessarily lead to higher returns, as the finance industry so readily promises.
“Sustainable investment does not necessarily lead to higher returns, as the finance industry so readily promises.”
Could sustainability come at the expense of return?
This could be the case when sustainability is combined with a passive investment style and only the “villain” is excluded from the index port-folio. This restricts the investment universe without being remunerated with a return premium from the market. A simple exclusion process (negative selection) can have a negative impact on return in the long term, in particular as many of the excluded companies perform better than the market. The example of sinful corporations confirms this evi-dence: Historical strings of data of US companies operating in less sustainable branches such as the production of alcohol or tobacco, show that they outperform the market systematically. The financial sector has only recently discovered the reason why this is the case.
Why do sin stocks outperform the market?The answer is good news for sustainability-conscious investors: Sinful companies do not perform better than the market because they ignore eco-logical or social standards, but because these are particularly profitable companies with a stable cash flow, high profitability and low debts. Although these characteristics apply to sin stocks, they are neither exclusive to them, nor do they automatically exclude sustainability.
A clear conscience and excess return – How does this fit?
Equivalent results can be reached with a clear conscience by combining sustainable criteria with an active investment strategy, focusing directly on these qualities. This particularly applies to minimum risk (minimum variance) investment. Companies whose share prices only fluctuate slightly are often prudently managed and do not violate ecological or social standards.
Sustainability can very eas-ily be implemented when using the minimum risk investment concept applied by OLZ. Strict sustainability criteria have been integrated into all OLZ funds since 2017, and prove that a “clean” or sustainable return is possible without return losses. The risk-return-profile of the OLZ funds has not changed despite the integration of sustainability.