Sustainable Investing with OLZ - More sustainability thanks to portfolio optimization

As outlined in the previous two posts, the definition of corporate sustainability is something very subjective. Some think primarily in terms of environmental impact, others more in terms of social issues or even corporate governance. Even within these topics, there are many different facets. In order to meet these diverse demands as far as possible, several factors come into play not only in the exclusion criteria, but also in portfolio optimization.

ESG-Score

One indicator that covers the topic of sustainability relatively broadly is the so-called ESG Score (Environment, Social, Governance). As with the exclusion criteria, we base this on the work of MSCI ESG Research - a leading provider of sustainability research. Each company is evaluated in the individual areas and a weighted «score» is determined. The higher this score, the more sustainable the company. As part of the optimization process, the aim is not only to minimize portfolio risk, but also to improve the weighted ESG score compared with the benchmark. The extent of the improvement depends on the score of the benchmark index - the lower its score, the more we improve the sustainability profile of our equity portfolio. The example of the OLZ Equity World ex CH Optimized ESG fund shows that the ESG score as of rebalancing on November 16, 2022 is 0.6 points better than the benchmark thanks to our optimization. This is also reflected in the MSCI ESG rating, which is directly dependent on the score: Our fund receives the grade «AA», while the benchmark is rated one level lower («A»).

CO₂ emissions

The environmental aspect is already taken into account in the «E» of the ESG score, but to give even more weight to the issue of global warming, a company's CO₂ emissions are explicitly included in portfolio optimization. Thus, on average, companies with lower CO₂ emissions are weighted more heavily than companies that have a high impact on the climate. As a result, our equity funds have a carbon footprint¹ and a carbon intensity² that are at least 30% lower than the respective market index. In the case of our example fund (World ex CH), both values have been reduced by significantly more than 30%. The CO₂ footprint of the OLZ strategy is only half as large in comparison with the benchmark.

Sustainability without distorting the minimum risk characteristics

The core of OLZ portfolio optimization aims at reducing investment risk. This manifests itself in comparatively lower volatility and lower drawdowns in negative market phases. With the integration of sustainability objectives into the optimization, the legitimate question may arise whether these central characteristics are not diluted. The good news: No! We already came to the conclusion some time ago that compared to other factor strategies (e.g. value, momentum, etc.) our minimum risk approach harmonizes very well with sustainability (read more here). So the better sustainability profile comes without any restriction of the investment style.  You benefit from a sustainable, long-term better risk-return ratio. If this win-win situation has aroused your curiosity, our consulting team will be happy to help you.