From an alternative angle into the focus of pension funds and insurance companies: Sustainability is becoming the new investment standard for institu-tional investors. Many private investors also prefer to invest in companies, which assume ecological and social responsibility. However, integrating ESG-criteria in the investment process is not quite so trivial. How do we implement sustainability effectively? Which environmental, social and gov-ernance (ESG) criteria do we ap-ply and how strictly? In addition, there is the question of return worrying foundation boards and pension funds. After all, there is empirical evidence that so-called “sin stocks” belonging to companies in socially controversial areas, such as the weapon, alcohol or tobacco industry, are regularly more profitable than the market index. Is sustainability therefore at the expense of return? This is something that hardly any pension funds can afford, faced with low interest rates.
The sixth Smart Investing Day on 24 January in Bern offered a platform for the exchange of experience and information between institution-al investors and academia, which was also ac-tively used in 2018. Sabine Döbeli (CEO, Swiss Sustainable Finance) staked out the topic in her opening presentation: What is meant by sustain-able investment? What are the possibilities for implementation? Where is the trend leading to? Pius Zgraggen (Founding Partner and CEO, OLZ) showed how sus-tainability has been integrated in OLZ’s investment process without a loss on return. The event was moderated by Kaspar Hohler (Editor-in-chief, Swiss Pension Fund).
Institutional assets as growth drivers
Sabine Döbeli is convinced that sustainable investment is more than a new fashion trend in the finance industry. It was not triggered by banks offering high returns, but influenced by environ-mental organisations, the media and the public. In several European countries, changes in regulations also played a role. In Switzerland the sharp in-crease in sustainable investments is attributed to institutional investors: a total of CHF 266 billion is invested sustainably (status 2016). Switzerland has, however, not taken a pioneer role and decided to pursue a voluntary approach, as opposed to France and Great Britain. The transition to sustainability is also appreciated by the pension funds. According to a survey, they would even be prepared to sacrify returns for sustainability. “They lack the platform to exert influence”, Döbeli however declared.
Improving risk-return efficiency
It is therefore the pension funds duty to act. According to Sabine Döbeli, it is not sufficient for them to simply make a few sustainable investments, or to remove the most disreputable stocks from their portfolio. “The Foundation Board needs to hold a fundamental discussion on values, motivation and targets”. For Döbeli it is natural that the re-turns and not ethical considerations are of primary importance to those responsible for the pension funds: “After all, that is their duty”. To avoid the transition to sustainability resulting in a loss on return, the ESG criteria must be integrated in the financial analysis and portfolio management from the start. This leads to better results than specify-ing exclusion criteria, but it is also more challenging.
“Integrated approaches do not compromise perfor-mance. They may even improve the risk-performance profile”, says Döbeli. For the implementation it is not necessary to carry out everything yourself: “You can also pass the ball to consultants and asset managers.” There is a good solution for (nearly) all investment categories.
ESG and Minimum Variance: The Perfect Match
Since the end of 2017 all OLZ funds are sustainable – and their performance is none the worse (see OLZ Research Note “Minimum Variance – a harmonious relationship”, January 2018). This transition is the result of three years of research and development work. For OLZ it was clear that any “fig leaf” solution was out of the question, i. e. not to create another single sustainable fund: “We wanted to fully integrate the ESG criteria into our risk-based investment process, without diluting it”, said Pius Zgraggen. For this reason, OLZ does not only consider exclusion criteria, but also applies ESG criteria as part of their portfolio optimisation.
With perfect timing a new study has been pub-lished explaining the mystery as to why “sin stocks”, which appear to embody the opposite of social sustainability, reach above average performance: Not because they “sin”, but because they belong to particularly profitable companies, which show a stable cash flow and low debts – all characteristics which also apply to low volatility stocks. Pius Zgraggen explains: “The same results can be achieved by combining ESG criteria and low volatility”. Sustainability can therefore be realised particularly well with a risk-based approach like OLZ Minumum Variance: neither does it result in a lower return, nor does it dilute the investment approach: Companies with equity prices fluctuating lower than the market are often prudently managed. In short: Minimum variance and sustainability har-monise best. Pius Zgraggen is fully aware: “Finding the perfect match also requires a bit of luck”.