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Sustainable investing with OLZ

In 2017, OLZ decided to systematically integrate sustainability (ESG) into its investment process. The focus on risk and the inclusion of sustainability criteria are the two essential components of our investment concept.

Why is sustainable investing important to us?

Investing in sustainable companies is no longer a passing trend these days. We are convinced that it is important to pay attention to sustainability criteria when investing. In this way, we can contribute to a sustainable economy and create good living conditions for future generations.

Sustainability criteria can be integrated into our investment process without compromising returns. We have analyzed this topic in our Research Note «Minimum variance and sustainability: A harmonious relationship».

How does the integration of sustainability criteria work in our investment process?

We have integrated sustainability in two steps. In the first step of our investment process, we use exclusion criteria and do not invest in companies that violate key ESG criteria. In the subsequent portfolio optimization, we give preference to companies that tend to have a better sustainability rating. We use the sustainability ratings of MSCI ESG Research, a leading global data provider in the field of sustainability, as the basis for our data. 

We use sustainability ratings from MSCI, a leading global data provider in the field of sustainability, adhere to the exclusion recommendations of the Swiss Association for Responsible Investment (SVVK-ASIR) and exclude companies that do not meet the UN Global Compact criteria.

What does sustainability according to ESG entail?

ESG is an acronym made up of the English terms Environment, Social and Governance. These three aspects provide the framework for assessing sustainability. 

Environment: 

  • Climate change
  • Sustainability 
  • Environmental pollution 
  • Nuclear technology  
  • Genetically modified organisms  

Social:

  • Human rights
  • Diversity 
  • Consumer protection

Governance:

  • Management 
  • Employees 
  • Shareholder rights

Which criteria are decisive for ESG integration in the OLZ investment process?

Selection of investment universe
Companies that violate key sustainability criteria are excluded («negative selection»). This includes:

  • Companies with lowest MSCI ESG rating «CCC»
  • Companies with serious controversies (MSCI Controversy «Red Flag»)
  • Companies that do not comply with the UN Global Compact principles («fail»)
  • Companies on the exclusion list of the SVVK-ASIR

Risk forecast
The introduction of sustainability criteria leads to reduced returns for capital-weighted investment solutions and for various investment strategies. Not so with our minimum risk strategy. So-called «sin stocks» - companies active in sectors such as alcohol, tobacco, gambling or weapons - outperform the market index on average. This outperformance can be explained by more stable cash flows, higher profitability and lower debt.

These are characteristics that low-risk stocks also exhibit - with one difference: they usually have a very good ESG rating. Thus, potential losses in returns in an ESG portfolio can be offset by a higher weighting of ESG-compliant companies - an approach that is in line with the principle of minimum risk.  

Portfolio optimization
Companies with a comparatively better MSCI ESG rating (best-in-class) are preferred in the portfolio optimization so that the following restrictions are met:

  • Absolute minimum ESG score: the optimized portfolio corresponds to an MSCI ESG rating of at least A at the aggregate level during rebalancing.
  • Relative minimum ESG score: If the ESG score of the benchmark is high, the OLZ portfolio has an MSCI ESG score that is at least as high.   

What are some examples of ESG inclusion criteria?

Companies with an MSCI ESG rating of «CCC».

MSCI rates companies on sustainability with an ESG score between 0 (very low) and 10 (very high). The database includes: Macro data, company data, government databases, newspapers, academic publications and news. The metrics are standardized within industries (best-in-class approach). From the scoring, the MSCI ESG rating is derived as follows in the example of «Wells Fargo»:

Source: MSCI ESG Database, 27.11.20 - Valuation as of: 15.11.2020

Companies with an MSCI «Controversy Red Flag»

Exclusion of companies that are involved in at least one significant controversy in the areas of environment, customers, human rights, labor rights and supply chains, and corporate governance. In the «Walmart» example, the result is as follows:

Source: MSCI ESG Database, 27.11.20 - Valuation as of: 15.11.2020

Companies with «fail» regarding UN Global Compact principles

The UN Global Compact list is a cooperation of companies with the United Nations with the purpose of making globalization more ecological and social. The pact was launched on January 31, 1999 by UN Secretary General Kofi Annan at the WEF in Davos. To date, over 9,200 companies worldwide have signed the UNGC principles. The UNGC follows 10 basic principles:

  • Respect and promote human rights
  • Ensuring that human rights are not violated
  • Acceptance of trade union involvement and collective bargaining   
  • Renunciation of all forms of forced labor
  • Participation in the abolition of child labor
  • No discrimination with regard to employment and occupation
  • Active prevention of environmental hazards
  • Promoting greater environmental awareness
  • Promoting the development and diffusion of environmentally friendly technologies
  • Combating corruption (incl. extortion and bribery) 

In the «Volkswagen» example, the result is as follows:

Source: MSCI ESG Database, 27.11.20 - Valuation as of: 24.11.2020

Companies on the SVVK-ASIR exclusion list

The Swiss Association for Responsible Investment (SVVK - ASIR) was founded in December 2015 by major institutional investors. The purpose of the association is to provide services to its members so that they can take a holistic approach to their responsibility towards the environment, society and the economy as part of their investment decisions. The following table provides an overview.




Questions and answers about sustainability at OLZ

Are certain sectors excluded?

No sectors or industries are excluded per se. However, since we do not invest in companies with the lowest MSCI ESG rating of «CCC», we do exclude those companies that perform the worst within their industry in terms of sustainability.

In which OLZ strategies are ESG criteria taken into account?

ESG criteria are included in all our equity and bond funds.

I am interested in how a specific company is rated by MSCI in terms of sustainability. Is this information publicly available?

MSCI publishes the ESG rating and material ESG aspects for over 2,800 companies here.

Can I compare the ESG ratings of OLZ funds with other funds?

MSCI publishes the ESG rating of numerous mutual funds and ETFs here.

In addition to MSCI, other data providers exist that rate companies on sustainability. Since different sustainability rating methodologies occur, results may vary between different providers.

I would like to build a portfolio with my own ESG criteria. Is this possible with OLZ?

For large investment volumes, an implementation with individual criteria - and thus also with own ESG criteria - is possible. However, the vast majority of our customers invest in OLZ funds with predefined ESG criteria.



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