Global Head of ESG Strategy, Credit Suisse
Environmental, social and governance (ESG) factors are useful indicators to assess how companies are managed and they increasingly influence where investors put their money. Our role as banks today is to support investors by providing transparency around ESG aspects of investment strategies, integrate ESG insights in investment advice, and provide innovative solutions that incorporate these principles in order to help entrench them in markets going forward.
We are convinced that by taking ESG factors into account, investors can make more informed investment decisions in relation to ESG.
One of the challenges we face as an industry is that there are many definitions and approaches to sustainable investing.
Exclusion of companies involved in controversial businesses or unethical behaviour was the bedrock and first fundamental of early sustainable investment programmes. Over the past decade, that focus has broadened, leading to the second component in sustainable investing: the systematic integration of insights on ESG-related risks – and opportunities into investment processes – with financial analysis that identifies companies that are better positioned against their peers going forward.
Material ESG factors vary between industries, particularly as different sectors are facing different sustainability challenges. For example, they could include supply chain management, employee satisfaction, or the strength of client relationships, which enables firms to cope better with challenging market conditions – such as we are seeing now in the Covid-19 crisis.
The third key aspect of sustainable investment strategies – other than exclusions and integration of material ESG factors – is impact investing. Impact investing is defined as an approach that explicitly aims at contributing to one or more of the UN Sustainable Development Goals alongside competitive returns.
ESG in the real world
Every investor has a different investment objective, so it is our job as a bank to find the right solution in terms of financial characteristics as well as ESG preferences. Some investors, for example, have specific sustainability aims, such as investing in companies developing solutions to climate change, so we have developed a structured assessment of client preferences taking into account the three aspects outlined above.
We see our role not only to explain what the sustainability characteristics of a portfolio are, but also how they relate to the client’s risk-return objectives. For example, if a client invests in renewable energies through a thematic fund, they would be exposing themselves to greater levels of volatility than by increasing their exposure to a sustainable healthcare strategy.
“Covid-19 has highlighted the inequality across society, and sustainable investors are keen to engage in investments that help to address this.”
Reports have also shown that ESG investments withstood recent market volatility better than their non-ESG investment counterparts did. For instance, a study of almost 2,700 companies conducted by Fidelity Investments between February 19 and March 26 this year found that companies with higher ESG ratings comfortably outperformed the S&P 500 index, whereas ESG laggards underperformed. In terms of a longer time horizon, a number of meta studies concluded that in over 80% of cases sustainable investment strategies performed in line or better than their non-sustainable versions.
Supporting investors with sustainable investing means offering an informed choice and there are many ESG investment options available today. This is particularly true in equities where historically most sustainable investment strategies have originated and where more data is available.
The availability of sustainable solutions in fixed income is improving and although there are some limitations in the alternative investment space, new products are increasingly coming to market in this asset class as well.
We are committed to finding the most suitable investment opportunities for each client, whether it is an in-house solution or one developed by a third party. In both cases, we aim to offer innovative investment approaches, which address client requirements that are not currently being met. Recent examples include strategies in the area of education, health and responsible consumption.
In the absence of clear market standards for sustainable investing, it is of utmost importance for us not to put ESG labels on products that do not meet our well-defined criteria. It is our commitment to provide full transparency on the ESG characteristics of our product offering. Investors deserve to know that a strategy is truly sustainable and why.
We recognise that not all traditional investment strategies can become sustainable immediately, as the transformation is an ongoing process. For this reason, we have introduced a Credit Suisse ESG label that is only awarded once we are completely confident that all applicable criteria are met.
Sustainable investing is becoming less of a niche. Therefore, our role is to ‘demystify’ sustainable investing, while our products and solutions continue to evolve based on the findings of internal and external research as well as regulatory developments.
The commitment to sustainable investing is particularly strong among the next generation of wealth holders. These investors have a greater desire than in the past to contribute to a healthy society and planet, thus leaving a positive legacy. Covid-19 has highlighted the inequality across society, and these investors are keen to engage in investments that help to address this – through impact investing, for example.
The events of recent months have forced companies and investors alike to look at so-called ‘non-financial’ aspects of investments. For instance, supply chain management is a key element of an ESG analysis, and the Covid-19 crisis has emphasised the importance – and fragility – of supply chains.
In the short term, funding for sustainable projects might fall in many parts of the world, as funds earmarked for climate change-related programmes are diverted to other areas of the economy. However, there are policymakers who see the current economic support programmes as an opportunity to address environmental or climate change related challenges. The strong momentum for sustainability will not disappear in the long term; it’s only likely to accelerate.
Our approach to sustainable investing can be summarised as “staying close to investors, providing research-driven, innovative solutions, and supporting the quest for sustainable portfolios with attractive risk-return characteristics”. This is essential because, in the very near future, ESG integration will be seen as nothing more than good investment practice.