The challenge for financial institutions is to consider the long-term implications of their investments. Climate change is an important topic, but human rights, labor standards and business ethics also require attention, as society and regulators are increasingly holding companies and financial institutions to account for their contribution to our common future.
The question, therefore, is where to start. A seven-step process can help make decisions on, and succeed in, sustainable investing (SI). The steps are:
1. Defining a purpose
First and foremost, time needs to be spent discussing and assessing the motivations for adopting SI with stakeholders, including clients. Some of the key drivers range from reacting to external pressure to being a full, pro-active believer in the benefits of SI.
Once these motivations are clear, it is a matter of drawing up a policy statement, or incorporating them into a statement of investment beliefs.
2. Setting priorities
A statement of priorities could help identify critical sustainability themes. There are several international codes and frameworks that can be of help, such as the United Nations Global Compact, or the Rio Declaration on Environment and Development.
Alternatively, an investor might prefer to focus on specific issues such as climate change, in this case using the Paris Agreement as a basis for developing a policy. The UN Sustainable Development Goals can also provide substance on how to frame goals and priorities.
It can be challenging to translate purpose and priorities into an investment strategy. The key task is to balance specific sustainability requirements with their impact on risk and return, and to do this over multiple asset classes. Broadly speaking, the three key considerations should be using overlays, adopting themes, and running risk/return analysis. So let’s discuss these in turn.
3. Considering overlays
Generally speaking, applying an overlay across an entire portfolio should not directly affect its performance. There are several overlay solutions within sustainable investing, led by the use of voting for equity holdings, engagement with companies to seek ESG improvement, or the exclusion of companies and countries
Most asset managers employ a voting strategy for their funds and mandates, though policies and practices can differ quite substantially. Engaging with companies can be a powerful tool for change: better control of ESG risks and awareness of opportunities can lead to better financial performance, and have a positive impact on society.
4. Theme implementation
There are several ways to implement a theme, be it climate change or more bespoke issues such as water scarcity or labor standards. One is by avoiding the worst offenders, or integrating the factor into investments: portfolio exposure could be targeted on the specific factor.
The investor could also engage on the specific theme (including voting and submitting shareholder proposals), or finally, invest in companies that provide solutions to the issue.
5. Risk/return analysis
Implementing sustainability characteristics can have an impact on the risk or return expectations for the portfolio. The implications will differ depending on the goal and the instrument used.
The process of setting sustainability objectives, determining a strategy and implementation is very similar to that of a regular investment process. In quantitative investing, the effect of applying sustainability guidelines and themes is easier to quantify using evidence-based research. In fundamental strategies, the ex-ante effect of using ESG criteria might be less easy to calculate.
6. Manager selection and monitoring
Once the initial steps are complete, it should be relatively straightforward to set up guidelines for asset managers. For large investors investing in segregated solutions, sustainability factors can be built into existing mandates if the asset manager has a good understanding and experience of SI. This might be more difficult for investors using pooled vehicles.
In both cases, the first task could be to assess the strength of the current manager(s) in relation to SI. An effective way to promote change would be to engage with them on improving their sustainability profiles. Holding roundtables to share knowledge can also be a powerful tool for change.
7. Integrating and evaluating
As a final step, the chosen objectives should be evaluated once a year, based on the sustainability reports of the managers involved. Ideally, this process should form part of the regular investment cycle to create a truly integrated ESG approach.
To sum up, implementing sustainable investing can take many years, and we therefore believe that investors should dip a toe into the SI water before jumping in. A first step could be to introduce exclusions and engagement, and a second to consider adding some aspects such as carbon footprinting or ESG integration to part of the portfolio.
The outcomes should be evaluated and monitored regularly, and could be embedded in existing structures as an effective way to achieve true integration. As experience in sustainable investing grows, so too will conviction.
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.