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WMs reveal how they handle ESG

Five wealth managers tell Citywire Switzerland how they keep a balance between ethical concerns and the need for profit.

In recent years clients have become increasingly concerned about the ethical impact of their investments, demanding the social, economical and governmental implications be taken into account.

Citywire Switzerland has asked five independent asset managers how they fulfil these ethical criteria without neglecting their fiduciary responsibilities. 

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In recent years clients have become increasingly concerned about the ethical impact of their investments, demanding the social, economical and governmental implications be taken into account.

Citywire Switzerland has asked five independent asset managers how they fulfil these ethical criteria without neglecting their fiduciary responsibilities. 

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Adrien Gagnebin

Corraterie Gestion

Geneva

More than ever before, clients expect more than just performance from their investments: they are willing to align their investment choices with their personal values.

We have noted increasing requests for specific ethical screening as well as for the inclusion of environmental, social and governance (ESG) standards in our investment selection processes.

While discussing the subject with our clients, we established their need for ESG investments based on concern for future generations. Being entrepreneurs themselves, they recognise that they have benefited from an incredible age of growth in their respective businesses and realise that such growth ‘at all costs’ is not sustainable in the long run. Having adapted their way of working to this philosophy, it is time to focus on their personal investments as well.

During this process, we discovered that the integration of ESG standards not only creates a stronger client-adviser relationship, but also improves the risk management of the portfolio. Investing in companies with strong ESG standards increases downside protection (less environmental issues, lower idiosyncratic risk), while maximising the potential upside (sustainable growth models, increased investments in innovation). Subsequently, the overall risk-return profile of the client’s portfolio is improved.

Finally, thanks to increasing interest in such standards, sustainable investing is moving away from its previous reputation of simply being an alternative to philanthropy (giving up potential returns in exchange for meeting ESG criteria), become a specialised asset class with returns comparable to conventional peer investments.

 

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Cecile Biccari

Contrast Capital

Zurich

Private wealth clients may have been late to the sustainable investment party, but they have recently caught up with institutional investors in their level of interest and commitment to investing responsibly.

This represents a big opportunity for independent wealth managers to advise them on how to reconcile their financial objectives and their sustainability concerns, and most importantly on how they can implement this across their investment decisions.

Yet independent wealth managers often find this challenging because the industry’s sustainable investment offering (and its associated jargon) has become increasingly complex.

Even though Contrast Capital is a boutique advisory firm specialised in sustainable investment, in our work with family offices we always put aside the labels (impact, responsible, ethical, sustainable investing) and focus on the underlying concepts.

Private clients form a very heterogeneous group and their motivations and risk appetite can differ significantly.

The first step is to help them create a solid understanding of their own values – or in most cases the shared values of the various family members through facilitated workshops – and how this could translate into investment opportunities in different asset classes.

The second step is to help them understand how this can be done within the context of their long-term financial objectives, be it capital preservation or liquidity needs, and their current asset allocation.

The third step is to consider whether they tend to invest directly or through external asset managers.

These aspects are all critical determinants of their future impact investment strategy. In our experience, private wealth clients rarely want to be in a situation of sacrificing financial returns for positive impacts. The younger generation in particular tends to believe that creating economic value and societal value goes hand in hand.

They are keen to get a better picture of the environmental and social impacts of their investment, but also realise that finding the right portfolio metrics is tricky, and that the most important thing is to understand how proxy indicators can increase their confidence that they are transitioning their overall approach towards a more sustainable one.

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Dominik Pfeiffer

Prosperis Sustainable Wealth Management

Zurich

When we founded Prosperis in 2009, sustainable investing was not attracting much interest. This has absolutely changed over the years. Awareness and acceptance of these investment strategies have risen substantially.

Our younger clients are particularly concerned about the impact of their investments. They want to make sure that the negative impacts associated with their investments are minimised. What’s more, we note an increased interest in investments that have a positive social or environmental impact. And we’re also seeing institutional clients increasingly searching for sustainable strategies.

One reason for this development is that the toolbox for sustainable investing has grown significantly, allowing more people to invest in the whole spectrum – from just excluding certain stock to real impact investing. Portfolios can now be tailored around the client’s risk appetite, values and their own understanding of what responsible investing.

To invest in a socially responsible way, investors need more than just financial information. Information regarding a company’s environmental and social responsibility and corporate governance is a key element of inherent risk evaluation.

With our ‘ethos’ sustainability ratings, we get an in-depth sustainability analysis which covers all environmental, social and governance criteria related to the company or issuer. Some companies will be excluded from our sustainable portfolio if the company's sales are derived from a sensitive sector (weapons, tobacco, the nuclear industry, genetically modified organisms and so on). Another exclusion factor is the presence of serious controversies (breaches of human rights or significant damage to the natural environment, for example). Overweighting the sustainable leaders and avoiding the serious controversies will lead to outperformance over the long run.

Even funds and ETF holdings will be screened and then rated. All these ratings are included in the client’s portfolio and are visualised in the reporting. The clients get to see their portfolio’s sustainability ratings and how much is invested in sensitive sectors.

It’s just great to see how the portfolio discussion with our clients becomes much more lively and profound when we discuss the ESG aspects of their portfolios, rather than just the financial figures and the macroeconomic outlook. We get a stronger picture of what our clients want and this has led to a much closer and deeper relationship with them.

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Johannes Borner

Santro Invest

Pfäffikon

Responsible investing cannot just be a trend – it has to be a conviction. Indeed, more and more of our clients show a serious awareness of the social and environmental impact of their investments. It still is a minority though, and the interest is more pronounced among institutional clients.

In the search for yield, impact investing has become a part of many portfolios and is now often a trigger for screening and adapting the entire portfolio. The obligation for pension funds to participate in AGM votes is another driver.

This is particularly apparent when it comes to the question of excessive salaries, or social and environmental themes. Best-practice approaches – including best-in-class filters and exclusion criteria – are then usually applied. However, we are convinced that it has to go beyond that.

In fact, our experience tells us that those organisations claiming to operate in a socially and environmentally friendly way need to adopt the most consistent responsible investment style. Their products, services and corporate culture require sustainable investing for survival. In such cases, standard selection criteria are no longer sufficient, as they often do not comply with specific ethical themes and tell you little about the future risks.

Instead, these portfolios have to be managed in a customized way. The challenge is therefore defining the right selection filter and meaningful performance ratios. The execution requires active management, as even specialised funds do not always fit.

As a small asset manager, we are flexible enough to respond to special requests and to do our own additional research where it is needed. And what about our performance? Even though our clients might make concessions, we won’t.

Social and environmental responsibility is part of our risk-aware investment approach. With more clients adopting responsible investing, the misbehaviour of companies will increasingly be reflected in the asset prices’ volatility and, as a result, in their performance.

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Morteza Firouz

Azure Wealth

Geneva

One question is becoming increasingly important for wealth managers: Can socially and environmentally responsible investing still be ignored in a portfolio?

The impact of investment is a growing concern for clients, particularly for a new generation of clients who are less interested in short-term performance and prefer long-term oriented portfolios with a socially and environmentally responsible component.

For several years, we have been increasingly allocating part of our clients’ portfolios to themes such as waste management, renewable energies and microcredit.

Some of the main challenges we are facing include the limited size of the responsible investing universe, liquidity issues and the transparency (or lack thereof) that companies provide on their ESG records.

We often find to that clients come to us with their own investment ideas that we need to evaluate, leading to interesting discussions about pros and cons.

Risk criteria must also be evaluated differently, and in some cases responsible investing can come at the price of a higher volatility, although by definition a lot of these investments are not related to traditional financial markets. It is therefore necessary to educate clients on what socially responsible investing entails.

Overall, we find that all our current and prospective clients are very receptive to ESG themes, and discussions on this topic make them feel more engaged with their investments.

The classic contractual relationship turns into a partnership, and clients feel that their investments provide a more positive impact, while avoiding some of the most controversial industries, such as tobacco and arms.

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