Sustainable Investments in Switzerland

Transcription

1 Sustainable Investments in Switzerland An Empirical Analysis of Asset Owners and Asset Managers on the Current Acceptance, Perceptions and Barriers MBA Project Report By Shinobu Ishibashi and Tuuli-Maija Laakso The University of St. Gallen, Switzerland, August 6, 2012 Supervised by Professor Dr. oec. Claude Siegenthaler In partial fulfilment of the requirements for the degree of MBA-HSG Acknowledgements: We would like to thank Mr. Pierin Menzli, Founding Partner of Contrast Capital and Prof. Claude Siegenthaler for their whole-hearted support and assistance throughout the MBA project. We also thank Dr. Timo Busch at ETH Zürich and Mr. Falko Paetzold at Bank Vontobel for their additional support and insights throughout the process. Finally but not least, we appreciate the support from our own families and their understanding.

2 Table of Content 1. Executive Summary 2. Introduction 2.1 Objectives 2.2 Scope 2.3 Research Methodology 2.4 Interview Guidance 2.5 Framing Research Questions: Challenges and Learning 3. Sustainable Investments and Relevance in Switzerland 3.1 Definition(s) 3.2 Sustainable Investment Landscape in Switzerland 3.3 ESG Investment Approaches 3.4 NEST Case Study 4. Empirical Interview Analysis 4.1 Family Offices/Asset Managers Characteristics of Interview Group Investment Approach and Current Challenges ESG Investing Barriers to ESG Investing 4.2 Pension Funds Characteristics of Interview Group Investment Approach and Current Challenges ESG Investing Barriers to ESG Investing 5. Conclusions and Recommendations 5.1 Common Conclusions and Recommendations 5.2 Family Offices 5.3 Pension Funds 6. Appendix 6.1 About Contrast Capital 6.2 List of participants 6.3 Interview Guidance 6.4 Glossary 2

3 Part I: Executive Summary This report provides an empirical analysis of sustainable investments by asset owners and asset managers in Switzerland. It identifies perceptions and barriers to adoption, and finally draws conclusions and makes recommendations to Contrast Capital, our business partner. Through in-person interviews of 28 pension funds, asset managers and family offices, we aim to analyse and understand the sustainable investment market in Switzerland. The report is structured as follows: In the introductory chapter (part II) the project scope, its objectives and applied research methods are described. This part also covers the framing of the interview guidance and the description of the key challenges and takeaways from developing the interview questions. In part III, we define sustainable investing, the current landscape and its relevance in Switzerland. We also describe sustainable investments compared to other investment approaches with overlapping objectives. As a best practice case study, we highlight NEST public pension fund. In part IV, we present the results of the in-person interviews separately for asset managers/family offices and pension funds. We analyse their investment philosophies, identify the most pressing investment challenges the firms face, and discuss motivation for sustainable investments as well as barriers and difficulties. Furthermore, we include relevant quotes from our interview partners. Part V discusses conclusions, and gives recommendations to Contrast Capital. Some of our conclusions are summarized below: Although asset managers and family offices are aware of ESG investments or have previously been involved in the area of such investments, strong scepticism is associated with ESG investments. Lack of proper information and education about ESG investments appears to be a key driver behind the scepticism of asset managers. Asset managers and family offices wait for a client trigger to develop and implement ESG investment strategies. 3

4 Uncertainty and doubts with respect to the companies or funds real ESG performance rating and how to measure the actual ESG impact cause aversion to adopt such investment strategies. In family offices the younger generations, who have inherited a significant amount of wealth from their parents, are increasingly asking about ESG and impact investments. Pension funds are long-term investors and they have the need to re-allocate their portfolio in the face of economic challenges and critically review new investment approaches. Large public pension funds could trigger wider acceptance of sustainable investments and influence other asset owners and asset managers in Switzerland. There is no stakeholder pressure as of yet in Switzerland for pension funds to adopt ESG investment approaches and regulation is not considered an effective driver for ESG investments for pension funds. Based on the conclusions above we highlight some recommendations to our business partner Contrast Capital: Establish peer-to-peer networks to foster education and training on ESG investments to overcome perceived barriers among pension funds, family offices and asset managers. Position Contrast Capital as risk advisory partner and develop a framework to incorporate ESG risks. Engage with the largest pension funds on UNPRI adoption and achieve positive market reaction and gain followers by other asset owners and asset managers. Conduct similar empirical study in advanced ESG regions (e.g. the Nordics) to exchange knowledge and best-practice examples. Develop a framework to measure the environmental and social impact of sustainable investments for asset owners and managers in order to overcome current scepticism. 4

5 Part II: Introduction The World Economic Forum Report Accelerating the Transition towards Sustainable Investing 1 mentions that sustainability is gaining importance in the field of investing. It also states that there is empirical evidence of better risk-adjusted returns of ESG investments, 2 which take into account environmental, social and governance factors compared to traditional investments. However, in practice, the level of sustainable investments still remains low and its adoption seems to be sluggish. In order to explain the inertia and the reluctance of acceptance among most investors, we aim to analyse the barriers of sustainable investing at various levels (such as individual vs. organizational). The report builds on current knowledge on sustainable investing trends and developments. The project research is primarily based on qualitative interviews, mainly in-person and some telephone interviews, with 28 asset owners and asset managers mainly located in German-speaking Switzerland. This report focuses on the interview insights, and concludes with our recommendations to our business partner, Contrast Capital. 2.1 Objectives The project intends to explore the current acceptance level of sustainable investments by asset owners and asset managers, and to assess the barriers to further adoption, e.g. individual reluctance, organizational framework, client acceptance, appropriate investment vehicles, education, knowledge etc. Based on interview insights, we identify potential avenues for wider adoption of sustainable investment among the mentioned asset owners and managers, and recommend next steps for Contrast Capital, such as identifying new business and research area. The following questions were asked to achieve our objectives: 1) What are the main issues that asset owners and managers are currently facing and how is it impacting their company s business? 2) What is the current level of acceptance of ESG investments? 3) What are the perceptions, views and opinions about ESG investments? 1 World Economic Forum, Accelerating the Transition towards Sustainable Investing 2011 Geneva pp Contrast Capital defines ESG investments as: 1) Long-term investment perspective (+5 years) 2) Environmental, social, and governance (ESG) factors are potential drivers of return and risk 3) The impact of an investment (i.e. external effects) is taken into account 4) Investment style that can be applied across existing asset classes (no new asset class, e.g. alternatives) 5

6 4) What are the hampering factors for adoption of sustainable investments? 5) How can those factors be mitigated in order to increase adoption of ESG investments 2.2 Scope The project, over a total time period of nine weeks, consists of several tasks: 1) Development of interview guidance (overview in the following chapter) 2) Further developing and maintaining Contrast Capital client database 3) Contacting potential interview partners via invitation letters and follow-up phone calls 4) Conducting interviews, which also includes transcribing each interview with the key ideas discussed in the interviews 5) Summarizing findings and developing recommendations Initially, the project was to consist of two separate streams, with the first stream to focus on in-person interviews with 20 family offices, pension funds and independent asset manager and the second stream for an online survey of 100 target group subjects with quantitative analysis. However, after realizing the time constrains, the scope of the project was narrowed down to focus all efforts on qualitative interviews with asset owners (i.e. public and corporate pension funds and single family offices) and asset managers (i.e. multi-family offices, independent asset managers) with a geographic focus on German-speaking Switzerland. The respondents were selected based on the type of company (pension fund, independent asset manager, or family office) and the amount of assets under management, which was to be over 300 million CHF. There was no pre-requisite of knowledge about sustainable investments. The first challenge was to find appropriate interview partners. Especially with family offices, which tend to be very secretive in the way they conduct business, this was a challenge. A key challenge with pension fund was their reluctance to participate in yet another interview/survey. Additionally, both investor types were afraid of another provider of financial products using interviews/surveys as a marketing tool. 2.3 Research Methodology Since we are trying to gain a level of understanding about the interviewees perception on sustainable investments, the research method of a qualitative face-to-face interview was deemed the most appropriate. This would allow us to assess the respondents answers on a more interactive level, and to ask follow up questions depending on the response. 6

7 Furthermore, we aimed to see what respondents spontaneously associated with the topic, without giving them preparation and reflection time. 2.4 Interview Guidance The interview guidance for our qualitative interviews, which was used to help us navigate through each interview, follows the research questions above and is split in five sections: a) In the first section, our goal was to get some basic facts about interviewees and their represented institutions, e.g. function and role of respondents, years of investment experience, and size of institution (measured in Asset under Management or AuM). b) The second section focuses on the firm s investment process and investment strategies. We were interested in understanding the differentiating elements of their investment philosophy and learn about their strengths and strategic focus. Understanding what the company s investment philosophy is might shed some light on why they make certain types of investments, and the strategy behind asset allocation. We also tried to understand how the respondent feels about overall portfolio performance in certain time periods. A question about approximate asset allocation within various common asset classes was included in order to better judge how the asset allocation fits in with the company s investment philosophy. The last part in this section dealt with current events (e.g. the Euro crisis, growth of the emerging markets, increased regulation) in the market place, which may or may not have a direct impact on how the company operates and how those issues shape the investment decision process. The main purpose of this question was to understand where, if at all, ESG investments fall in the importance of issues. c) The purpose of the third section, which dealt with ESG investments, is to begin digging deeper into what the interviewee thinks about ESG investments, and what are his or her previous experiences with them, if any. It also went more into detail about factors such as uncertainties, risk factors and performance of ESG investments, to gauge whether the interviewee had some pre-existing notions about ESG investments. Furthermore, we asked questions to try to assess whether the interviewee has the correct understanding of what ESG investments are, since ESG investments are different from impact investments, although the two are often confused. In the second part of this section, the questions were mainly towards those who already have ESG 7

8 criteria taken into account in investment decisions, to try to better assess how the companies are trying to emphasize the institution s ESG investment approach. d) In the fourth section, we asked the interviewee to discuss the barriers that he or she sees with ESG investments. From these answers we tried to assess the most critical of our research questions, which is to understand why investors are not using ESG investments. We also tried to understand whether prior experiences are a contributing factor to negative perception of ESG investments, and what would be required for the investor to enter the ESG investment sphere again. In this section, we also attempted to assess which internal and external factors might impact the interviewee s opinion of ESG investments. Finally, we included questions about whether the interviewee and his or her firm have sufficient knowhow and experience to assess risks or opportunities stemming from ESG investments. From Contrast Capital s perspective, this is a very important question to understand whether a significant need for consulting services to asset owners exists. e) The very last section of the questionnaire included typical closing questions for an interview of this nature relating to anonymity and any additional comments the interviewee might have. 2.5 Framing Research Questions: Challenges and Learning We have also designed the interview guide to trigger deep discussions from the interviewee s side, rather than just giving yes or no answers (so called semi-structured interview guide ). The discussion should be spontaneous so that we can gather insights by probing questions. We have included questions as below to assess the individual, organizational, and cultural-level barriers, as part of our discussion: Individual-level: Do you feel more comfortable with traditional investments? Organizations internal structure: How important is the mandate or commitment from the board, as well as the requests from the beneficiaries of pension funds, in selecting ESG investments? Language and terminology: Do you think sustainable investments are a marketing tool? Rewards: Would regulatory systems favourable for ESG such as tax breaks or internal incentive systems drive you for ESG investments? 8

9 Organizational inertia: Are you and your organization open to new investment ideas and styles? Although we spent significant time developing the interview guide and questions, some of the questions didn't generate responses as intended. Do you think there is sufficient internal know-how and experience in your organization? The question turned out to be too directly framed from our (interviewers ) viewpoint and didn't work to capture the true and honest assessment of interviewees own knowledge and experience. Most of the interviewees answered, Yes, we have enough know-how or, It doesn't matter as we could hire external people. The question didn't induce honest descriptions of internal situations as an issue. Similarly, on the question Do you think training and education would be useful? more than half of the interviewees answered, Yes, training is always useful but we don't have enough time for that. Also, one interviewee felt resentment with regards to this question, saying, You should see who you are talking to! On the other hand, when we changed the question slightly to, Do you think training and education for the board would be useful? they were much more willing to admit, Yes, we need it. It would have been also useful to have separate interview guidance for the two groups, as some questions were more pertinent to pension funds than to family offices. 9

10 Part III: Sustainable Investments and its Relevance in Switzerland 3.1 Definition(s) There are multiple different definitions of sustainable investments. Eurosif 3 uses the term "SRI" (Sustainable and Responsible Investing) for any type of investment process that combines investors' financial objectives with their concerns about Environmental, Social and Governance (ESG) issues 4. According to FNG 5, Sustainable Investment is the umbrella term for sustainable, responsible, ethical, social and environmental investment and all other investment processes that take the influence of ESG criteria into account in their financial analyses. The World Economic Forum defines Sustainable Investing as an investment approach, which integrates long-term ESG criteria into investment and ownership decision-making with the objective of generating superior risk-adjusted financial returns 6. These extra-financial criteria are used alongside traditional financial criteria such as cash flow and price-to-earnings ratios. The focus on superior risk-adjusted financial returns distinguishes sustainable investing from similar-sounding approaches such as impact investing or socially responsible investing, in which lower financial returns can be accepted as a trade-off for meeting social or environmental goals. A similar definition comes from Generation Investment Management that state in their Sustainable Capitalism" manifesto that in order to overcome challenges such as climate change, water scarcity, and poverty, we are to take actions to correct market failures 7. While governments and civil society need to be part of the solution to these massive challenges, ultimately it will be companies and investors that will mobilise the capital needed to overcome them. Sustainable investments is a framework that seeks to maximise long-term economic value creation by reforming markets to address real needs while considering all costs and stakeholders. Throughout this study the term Sustainable investing and ESG investing will be used interchangeably. 3 Eurosif (the European Sustainable Investment Forum) is a pan-european network and think-tank whose mission is to develop sustainability through European financial markets. 4 Refer to Glossary in Appendix for details 5 Forum Nachhaltige Geldanlagen: accessible at 6 World Economic Forum, Accelerating the Transition towards Sustainable Investing 2011 Geneva pp. 8 7 Generation Investment Management LLP, 2012, Sustainable Capitalism pp. 7 10

11 Our business partner, Contrast Capital, states that below are the firm s definition criteria for Sustainable Investing: Long-term investment perspective (+5 years) Environmental, social, and governance (ESG) factors are potential drivers of return and risk The impact of an investment is taken into account Sustainable investment approach can be applied across all existing asset classes This definition implies as well a clear differentiation from the recently developed investment concept of Impact Investing. This approach puts the social investment impact (and sometimes the environmental impact) in the centre of the investment focus. The expected financial return (at or below traditional market return) is generated alongside the social return. Philanthropic activities are not geared towards generating a financial return since they have the character of a donation or grant with a clear social and/or environmental mission. All of the ESG investments, Socially Responsible Investments, Impact Investing and Philanthropy aim at generating social and environmental impacts, whereas traditional investments have no consideration for these. Hence there is a trend that traditional financial measures such as risk and returns are sacrificed, whereas this is not the case for ESG investing. Indeed, with respect to risk management, ESG investments are, on average, superior to traditional investments. Financial return-wise, there is no significant difference between ESG investments and traditional investments: it could be worse or better. 3.2 Sustainable Investments Landscape in Switzerland According to a study by FNG, 8 at the end of 2010, the Swiss market of sustainable investments (among asset managers, excluding pension funds) reached 42 billion CHF (funds, mandates and structured funds), which corresponds to an increase of 23.2% year on year. This indicates a good resilience of the sustainable market given the challenging market environment and investors risk aversion. In 2011, funds accounted for approximately 53%, mandates for 44% of the total sustainable investment market volume. As for investor distribution, institutional and retail/private investors each represent about 50% of the market. In 2011 the market share of equity 8 FNG, Ivo Knoepfel, David Imbert 2011 Sustainable investments in Switzerland 2011, pp. 4 11

12 investments is about 53%, while the market share of fixed-income investment is 31%. The increase of assets managed through mandates is due to institutional mandates for which sustainability considerations were for the first time integrated directly into financial analysis and investment decisions. This marks a new trend in the industry towards integration of sustainability in asset management. 9 (Source: FNG, Sustainable Investments in Switzerland 2011 pp. 11) As for pension funds, according to a Swisscanto s survey that covers 326 pension funds in Switzerland, 10 sustainable investments account for 3.8% of the total asset allocation among those pension funds, representing 20 billion CHF in A trend is that larger public pension funds have propensity to invest in sustainable investments. 3.3 ESG investment approaches Over the past fifteen years, several ESG investment approaches have been developed as more ESG data and information have become widely available for publicly listed corporations. Today, different investment approaches are used in combination in order to address investors concerns or to fulfill investor expectations. Not only has the equity asset class seen strong growth in ESG investments but also the corporate bond and to a lesser extent the government bond asset class has incorporated some elements of ESG investment approaches. The table 9 Ibid. 10 Swisscanto Vorsorge AG 2012 Schweizer Pensionskassen

13 below summarizes the definitions and the characteristics of such approaches. 11 For additional explanations, see the glossary in the Appendix. Each asset class has its specificities and some ESG investment approaches are not applicable across asset classes (e.g. active ownership for government bonds) Some approaches apply to institutional investors only, not retail investors Availability of ESG data limits the implementation of all ESG investment approaches, in particular for investments in emerging markets For some asset classes (e.g. infrastructure, private equity, commodities, and real estate) it is pre-mature to assess the available ESG assessment approaches ESG I nvestment Approach Positive Screening Negative Screerning Integration Active Ownership Definition Seeking to invest in companies with a positive ESG corporate performance, and/or that produce products/services with a superior ESG profile, and/or Avoidance to investment in targeted companies, industries and countries ESG factors influence investment risks and returns and thus incorporate into investment analysis and decision making Recognize and exercise shareholder responsibilities by voting and engagement (active dialogue) with Type Best-in-Class Pioneer Screening Thematic Investments Ethical Exclusions Integration Voting Engagement (Source: Mercer, 2011 Climate Change Scenarios Implications for Strategic Asset Allocation ) The graph below shows the current adaption of ESG investment approaches by investors in Switzerland. 11 Mercer, 2011 Climate Change Scenarios Implications for Strategic Asset Allocation 13

14 (Source: FNG, Sustainable Investments in Switzerland 2011 pp. 11) 3.4 NEST Case Study Good Practice Example NEST is a collective pension fund ( Sammelstiftung ) for small to medium sized companies and has its head-quarters in Zürich, Switzerland. Since the incorporation in 1983, it has won 2,545 affiliate companies with 14,509 people insured. The average number of employees for the NEST member corporations is five. Currently, assets under management equal 1.3 billion CHF (March 2012) with a past annual investment performance of 2.8% in Growth of Asset under Management 1,200 1,120 1, ,007 Mio. CHF AuM (Source: Nest Sammelstiftung Provisorischer Geschäftsbericht 2011 pp. 3) NEST believes that using ESG as an investment philosophy is the reason why companies choose NEST as their pension fund. NEST describes itself as Die ökologisch-ethische Pensionskasse (The environmental and ethical pension fund) and it has recently signed to UNPRI. NEST is the most advanced pension fund in Switzerland in terms of ESG investment philosophy among those we were able to get in touch with. The firm does not only apply negative and positive screening but also implements active voting in shareholders meetings as well as engagement and active dialogues with the companies they invest in. NEST s data and research provider, Inrate, 13 also works on incorporating ESG factors into investment decisions. 12 Nest Sammelstiftung Provisorischer Geschäftsbericht 2011 pp Inrate, accessible at 14

15 Sammelstiftung 14 could be the most advanced type of pension institution in terms of ESG consideration in the investment philosophy as part of the preference expression, because it has to attract membership corporations with a clear and differentiating value proposition to join its pension scheme. Also, they have to compete in the pension market with other pension scheme providers such as insurance companies, ensuring at least similar financial returns as they do. Christoph Müller, NEST Sammelstiftung, Zürich By sticking to those industries and companies that meet the ESG investment criteria, NEST generates consistent financial returns. Indeed, they record more stable and slightly higher returns than other pension funds. Comparing NEST s investment performance with a benchmark (Credit Suisse Swiss Pension Fund Index or CS PK-Index ), we observe that the volatility is much lower, especially in the years with negative returns. By investing with ESG criteria, NEST was able to mitigate the negative shocks. This could be a strong supporting factor for ESG investments, eliminating negative risks and achieving long-term performance. (Source: Nest Sammelstiftung, Provisorischer Geschäftsbericht 2011 pp. 3) 14 It is a form of pension fund in Switzerland and stands for collective institutions in English. Other forms are Gemeinschaftsstiftungen. Vorsorgeeinrichtung, which includes Pensionskassen and geschlossene Gemeinschaftsstiftungen. 15

16 Part IV: Empirical Interview Analysis 4.1 Interview Group 1 - Family offices and asset managers There are approximately 2,600 independent asset managers, including multi-family offices, in Switzerland, of which around 1,200 are in the German-speaking area. 15 Due to timeconstraints, we were only able to contact about 80, or 6% of the target group. From the 80 that were contacted, a positive response was received from 15, and a total of 13 were interviewed for the purposes of this report. However, two out of the 13 were not classified as a family office or an asset manager, and these responses were excluded from the study. Each contact which received an invitation, also received a follow up call, and a second call some days later if no response was received. Difficulties in scheduling interviews were mainly due to lack of interest in the topic and lack of availability in general. The following analysis will be split into four sections based on the interview guidance: first, we look at the demographics; in the second section, we discuss general investment strategies and philosophies; in the third section, we go into more into detail about the ESG investments; and in the last section, we focus on barriers to ESG investments Characteristics of Interview Group The interview group consisted of four multi-family offices, two single family offices, four independent asset managers, one asset management arm of a private bank and two others in product structuring. The seven of the interview group had assets under management of between 2 and 3.5 Billion Swiss Francs, with a four smaller firms or with an undisclosed amount of assets under management. The companies, excluding the private bank, had between 5 and 50 employees, with the majority falling on the lower end of the scale with 8-14 employees The interviewees were all either a managing partner of the firm, with client/portfolio management responsibilities, a chief investment officer, a founder of the firm or a portfolio manager. All but one of the respondents had at least of ten years of investing experience, with seven reporting 15 or more years of experience and all had been with the current firm for less than 10 years. Three of the interviewees were company founders, but in that case the company s founding date was used as a reference point. 15 FINMA Accessed July 26,

17 4.1.2 Investment Approach and Current Challenges The over-arching themes were mainly focused on long-term investment approaches, wealth maintenance, cost-effectiveness, transparency and risk management. Respondents reported that the investment approach the firm is applying has mainly a long-term focus, which falls along the lines with the main investment strategy of wealth maintenance rather than aggressively pursuing high returns. The interviewees firms target high net worth and ultra high net worth individuals, who generally are well-established, and are concerned about passing the wealth onto the next generation. Another theme that could be seen is cost-effectiveness and transparency with regards to the asset allocation. Respondents felt that due to the bad reputation the industry has received, it is essential that the clients understand the products and do not spend significant amount of fees, which also served as a restricting factor in terms of asset allocation. Risk management is also seen as an important theme, and for some firms, it is at the center of the firm s investment philosophy. If you manage the risk appropriately and professionally, the returns will come. This is at the core of our investment philosophy Jacques Stauffer, Parsumo Capital, Zürich The most pressing issues the firms are facing mainly relate to macro-level issues, such as the current economic environment and its impact on regulation, and the Euro crisis. The economic environment, especially in developed countries, is causing two trends: a shift of investment towards emerging markets, and a strong sentiment against the Euro, with some getting out of all Euro positions. Respondents are also concerned about the lessening importance of Switzerland as a financial nest. This shift is causing many to consider a new strategy that puts less importance on the Swiss market as a whole. For independent asset managers and multi-family offices, which are regulated by the FINMA, increased regulation has not caused significant changes in the way the firms operate. However, one trend which is apparent in the interviews is a higher rate of consolidation. This was mentioned by five interview partners, that they expect smaller firms to either go out of business, or more likely, to look to merge with another firm. 17

18 Environmental issues were not mentioned as a major concern for the firms, mainly due to the fact that the firms are currently more preoccupied with the above-mentioned macro-level issues. The following quote illustrates this sentiment. Sustainability is important and it is on our minds, but it does not always protect our clients wealth Jürg Frey, Marcuard Family Office, Zürich ESG Investing All of the interviewees had at least some knowledge of ESG investments, and have had various degrees of contact with them at some point in their professional careers. However, only two were aware of the United National Principles of Responsible Investing (UNPRI). When asked the question of what the respondent thinks ESG investing is, they often asked the same question back, as there is no one definition that fits for everyone. From the interviews, the following points should be highlighted: Only four interviewees currently have clients who are investing in ESG investments, with one company, SEED Asset Management (highlighted below), reporting a set ESG investment approach as part of the firm s strategic asset allocation. All of the interviewees responded that ESG investments are an investment approach with an overlay to existing asset classes, versus a separate asset class. All of the respondents either expressed that they are not sure how sustainable investing is defined and measured, or said that their clients are confused about it. There also seems to be a perception that it may be used as a marketing tool, or a way to find a niche segment, as competition in the regular asset management or banking sector is really high. From a risk perspective, the group felt that in their opinion, the risk profile of ESG investments should be the same as for conventional investments or even better, since technically, a company which acts in a socially and environmentally responsible way is likely to mitigate its risk factors. Family office respondents commented that their clients, even though not involved in ESG investing, have a high affinity to philanthropy. As will be discussed in the next section about barriers to ESG investing, five respondents felt that a lack of returns and track record was a major issue, and therefore, clients would rather give money to organizations via contributions to philanthropy. 18

19 "Philanthropy is the right way to go, and clients can do much more good with it. There is no need for performance measurements and the money goes directly to where the need is." Stephan Kehrli, KehrliZahnder Family Office, Zürich However, three interviewees stated that clients do ask about ESG or impact investments and increasingly, it is second or third generation female members of the family who seem to have more interest in the topic. This, according to those respondents, is because the younger generations have never invested money before, and do not have set criteria. There is a lack of inertia for change, as families are used to investing in certain companies and industries. Change for investors, especially in the older generations, is very difficult. The younger generations are now inheriting a lot of money and have to begin thinking about what to do with it. Nicola Carcano, MVC Family Office, Lugano Although the number of responds who currently have ESG investments in the client portfolios is small, as stated above, all of the interviewees were aware of the growing interest in the topic and realize that there is a large likelihood that the importance of ESG investing will grow in the coming years. Respondents have also thought about how more sustainability themes can be incorporated into the business world and investing in general. "It is important to ask oneself: would it be interesting to do the opposite and exclude companies completely from the system that are not sustainable? Can we look at a world that is only sustainable and the only world that exists is a sustainable world?" Jacques Stauffer Parsumo Capital, Zürich A good practice example is SEED Group, an independent asset manager and multifamily office located in Zurich. The company offers, in addition to traditional investment strategies, sustainability strategies for investors. The firm s consideration 19

20 for sustainability topics can be seen in its central philosophy: Balance in Life, Balance in Investing. Their investment philosophy is simply investing with a good conscience without missing out on performance, and because it makes sense. Many studies support the conclusion, that companies that include social and environmental responsibilities are not only more productive, but eventually turn out to be more profitable than their competitors. However, it is important to find the right balance between socio-ecological developments and economic forces. ESG Investments should be more appealing to investors, as there is less litigation risk and the products are safer. Giorgio Blum, Founder and Managing Partner of the SEED Group Barriers to ESG investing We now tried to identify the barriers that exist for further adoption of ESG investments from the interviewees perspective. We find that these barriers consist mainly in the difficulty in identifying appropriate firms to invest in and the limited transparency and lack of ability to measure the impact of the investments. The following graph illustrates all the barriers to acceptance, where the respondents could name as many as appropriate. (The interviewees (n=11) were asked in question 4a: Please discuss the following barriers to ESG investments. Multiple Choice Question) 20

21 The inability to properly identify firms or funds that are truly sustainable, based on the interviewees own opinion, was mentioned in every interview as a barrier to further adoption. Nine of the interview partners feel that since our world has become so intertwined and global, ensuring that each step of the supply chain has been accounted for in terms of sustainability is not only difficult; it may be completely impossible. For example, one interview partner mentioned that keeping track of the level of sustainability at all times is a very time-consuming and expensive proposition, and still not a guarantee that full sustainability has been achieved. A related second theme, which was echoed in all of the interviews, is the inability to measure the extent of sustainability of the investment. Many people who do not invest [in ESG investments] are not convinced of the impact and are highly sceptical of how to measure it. If the investment is not bringing in strong returns, then they at least should have a measurable and significant impact. How to measure it is the problem. - Nicola Carcano, MVC Family Office, Lugano Respondents also felt that although larger companies often include sustainability reports as part of their annual reports, which gives a positive sustainability score to the company. Many times these scores are not correct. Furthermore, some smaller firm might have a much better sustainability performance. However, a lack of a specified corporate sustainability desk excludes the firms from being rated. It is clear that this is a source of mistrust for investors. Also, the lack of an all-encompassing definition was mentioned several times as an important barrier to ESG investing. Respondents overall commented that the definition varies too much, there are too many definitions, it is too confusing and there is too much terminology associated with these investments. Furthermore, scepticism of the firms and their intensions also surfaced, as one interviewee summarized what had been echoed in all of the interviews: The big question is: what is sustainable investing? From many perspectives, it appears to be only a marketing tool for many firms to differentiate themselves from other firms. Nine interviewees stated that a lack of a direct client mandate to include sustainability factors is a barrier for them. Furthermore, this barrier also goes hand in hand with 21

22 perceived poor performance factors. From their perspective, it is difficult to sell ESG investments to clients even though the firm s management has personal convictions about them, as long there is no track record. Many clients lost money investing into solar, and are not willing to invest in renewable energies, until there is a track record of returns. Although a lack of personal conviction was not seen as a major barrier to ESG investments, but rather a symptom of the other factors, many of the respondents stated that investors personal conviction is the biggest driver in motivating them to begin investing into ESG investments. The interview group felt very confident about their level of knowledge about ESG investments within the firm. Only two firms stated that a current lack of knowledge is a barrier for further adoption. Eight respondents did, however, state that although the firm does not have enough knowledge about ESG investments, they feel confident that this information is readily available, if a client wanted to begin investing in it. Interestingly, nine respondents did not feel that external incentives, such as tax breaks from the government on gains on ESG investments, would be a good idea to encourage increased adoption. Instead, a majority thought that government incentives generally hinder the development of such investments in the long-run. 22

23 4.2 Interview Group 2 Pension funds According to research by the statistics bureau of the Swiss government, there are more than 2,000 pension funds in Switzerland. 16 This includes both corporate and public pension funds, representing total assets of 644 billion CHF in The biggest pension funds in terms of AuM in Switzerland are AHV (42 billion CHF), PUBLICA 17 (33 billion CHF), BVK 18 (21 billion CHF). Those public pension fund players represent a significant investment size (approximately 100 billion CHF). They have started move into alternative asset classes over the past years and are becoming key players in these markets. With their market power, they are the ones who determine the rules of the game and hence we were interested in getting their views and opinions on ESG Investing. We have interviewed 17 people representing 15 pension funds from Switzerland and two from Germany. Overall our sample consists of six corporate pension funds, eleven public pension funds). Among those we have covered nine pension funds among the top 50 largest in Switzerland in terms of assets under management Characteristics We contacted 100 pension funds via and telephone. Below are the summary statistics. 100 pension funds contacted by and telephone 12 responded positively (participated in the interviews) Eight declined our invitation Five interviews resulted through personal contacts, both within and out of the defined interview target group First, we see a clear difference between public pension funds and corporate pension funds in terms of willingness to participate in the interviews. It appears that public pension funds are more open and accessible, and are willing to participate in the interviews, whereas the corporate pension funds, including the biggest ones, are much more closed. The six corporate pension funds we were able to have an interview with happened either through personal connections or because of personal interests in the interviewers background (e.g., Japan). 16 The Swiss Statistics Bureau 2010 Die berufliche Vorsorge in der Schweiz Pensionskassenstatistik 2010 pp Pensionskasse des Bundes PUBLICA, accessible at 18 BVK Personalvorsorge des Kantons Zürich, accessible at 23

24 Most of the negative responses received were due to the fact that these firms do not engage in ESG investments yet, and also due to the busy agenda before the summer vacation Investment Approach and Current Challenges The main objective of pension funds is to generate solid returns for their beneficiaries, and therefore, the risk management is one of the key criteria mentioned by all interview participants. However, current macro-economic uncertainty and very low interest rates lead to a lack of investment opportunities. One interviewee exemplifies the current situation with the following quote: We are under the situation that we have to keep baking small breads (rent payments to pensioners). Anonymous interviewee More than half of the pension funds mentioned passive investments (replicating market indices) as their investment philosophy. This is an effective way to keep the (perceived) risks and fees low (e.g., 10 bps currently in the case of the Pension Fund of the City of Basel, as opposed to 60 bps on average in the industry). On the other hand, some respondents argued that sustainable investments require an active investment style associated with higher fees. Also, by applying investment filters it could lead to higher standard errors to some extent 19. As for the current economic situation, the respondents unanimously said that the low returns and low interest rates are a challenge. There is also no doubt that the demographic change and the ageing population is a challenge. Together with meeting regulatory requirements such as the coverage ratio 20, pension funds face a difficult situation in general to keep baking small breads. Some of them also mentioned the imminent need of changing the conversion rates 21 or technical interest rates 22 used for calculations in order to meet the economic reality, which would involve dialogue with all the stakeholders involved. 19 Tracking error is s divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. (Source: Investopedia, accessible at 20 The coverage Ratio is a figure used to calculate the solvency and ability of a pension fund to meet its liabilities. A ratio above 100 per cent indicates that the fund is in good health and capable of meeting its payments or liabilities, while a ratio of less than 100 per cent means the fund is in danger of being unable to do so. (FT Lexicon, accessible at 21 The conversion rate, or 'Umwandlungssatz' is used to calculate pensions from accrued assets 22 The technical interest rate is a guideline provided by FINMA that indicates the maximum guaranteed return that an annuity can offer to the client 24

25 4.2.3 ESG Investing Most respondents (12 out of 17) are aware that ESG investments are one of the hot topics or the biggest theme in recent years among pension funds investments. On the other hand, the levels of implementation and activeness of internal discussion vary across pension funds. We can distinguish three groups in terms of their degree of sophistication in ESG investments: first, those which haven t started any ESG investments yet; second, those which apply the basic ESG criteria such as exclusion (no investments in weapons, nuclear energy, gambling, etc.); and third, those which implement ESG as the core of investment approaches. Roughly speaking, about half of the pension funds interviewed belong to group 1, and 40% to group 2. Only a few pension funds (NEST, AHV and Roche), from our interviews, qualify for group 3. Most of the corporate pension (four out of six) funds haven t incorporated ESG investments in investment process. On the other hand, most of the public pension funds interviewed (seven out of 11) have a certain level of consideration of ESG factors built into their investment policy (e.g., negative screening). AHV, the largest public pension fund in Switzerland states that ESG has been incorporated in their investment principles since 10 years. This contrast could be easily understood given the higher exposure that public pension funds face. In contrast, corporate pension funds have little public exposure. In line with this, corporate pension funds tend to have a higher degree of delegation and discretion for investment managers in terms of investment approaches and asset classes; that is, the only objectives and performance measures are returns. We didn't see any significant difference regarding time-horizon of investments. As for ESG activities in place, active voting and ESG integrated in the investment policy are the most common among public pension funds. Among corporate pension funds, ESG activities consist mainly of active voting, with an emphasis on issues about payments to management. 25

26 (Number of respondents: 17, multiple choices) With regards to the classification of ESG, most of the pension funds answered that ESG investing is applicable to all existing asset classes rather than a separate investment class. Mr. Müller from NEST pointed out that 10 years ago it was a separate asset class (part of the Alternative asset class ) whereas currently it should be an investment approach applicable to all the existing asset classes. For the motivation for ESG investing, some mentioned the consideration of environmental risks, an attractive risk-return profile and the elimination of reputational risks, although those don t seem to be very strong drivers per se. Few pension funds answered that ESG investments should generate higher financial returns because of the consideration of ESG factors while most of the respondents (10 out of 17) answered there is no significant difference in returns. Social and ethical and even philanthropic considerations, however, seem to be more important than external drivers such as favourable regulatory schemes. Some mentioned that mandate and the commitment from board could become a strong driver. Opportunities for ESG Investments: In the challenging environment of low returns of the fixed-income asset class, pension funds are looking for new opportunities and diversification. Some pension funds try to diversify the portfolio by expanding into alternative investments such as hedge funds (CAT bonds 23, CTA 24 funds, etc.) and 23 Catastrophe Bond is an insurance linked product and meant to raise money in case of a catastrophe such as a hurricane or earthquake. 26

27 private equity. Real estate remains a core asset class for public pension funds (five out of 17) hold a quarter of the assets in this asset class. According to a sustainable construction specialist, most of the new constructions in Switzerland follow the ecological standard of Minergie, 25 which leads ESG investments in real estates among pension funds, with the yield of 4-5 % annually. The challenging part is to find good investment targets, given the booming market and the high prices of the real estates. Some pension funds do foresee chance for ESG investing in this sense. They think that ESG investments lead to long-term returns because: ESG factors work as a proxy for capturing other success factors, such as good management, for companies future performance ESG factors themselves generate long-term financial returns ESG investments mitigate social and reputational risks (e.g., tail risks as seen in TEPCO and BP) ESG investments work to diversify current portfolio ESG investments attract members (or investors) for the pension scheme A majority of the pension funds (nine out of 17) think that there is no significant difference in returns between ESG investments and traditional investments. It is encouraging that the pension funds don't perceive that financial returns would be necessarily lower for ESG investments, although it would require further conviction to push them for ESG investments Barriers to ESG investing The barriers associated with ESG investments will be discussed at three levels, first with regards to practicality, second at the individual psychological level, thirdly at the organizational bias. 24 'Commodity Trading Advisor funds: funds managed by an individual or a firm, registered with the Commodity Futures Trading Commission, that receives compensation for giving people advice. 25 Sustainability brand for new and refurbished buildings. It is mutually supported by the Swiss Confederation, the Swiss Cantons along with Trade and Industry. Accessible at 27

28 Barriers with regards to practicality Investment horizon Long-term investment horizon seems to be the biggest challenge for pension funds. Throughout the interviews, the long-term horizon of ESG investments was mentioned the most frequently among the barrier elements. This seems to be a contradiction: why would pension funds think that the long-term horizon of ESG investments is a major challenge, while they have a long-term commitment to manage their funds and identify themselves as long-term investors? The problem of a short-term performance pressure focus stemming from organizational processes (e.g. monthly/quarterly performance reporting) as well as from biases in decision-making will be discussed later. (The interviewees (n=17) were asked in question 4a: Please discuss the following barriers to ESG investments. Multiple Choice Questions) Investment vehicles More than half of the pension funds mentioned the lack of appropriate investment vehicles for ESG investments, although there are more than enough financial products offered by banks. It indicates that the problem is not in the number of products but the convincing power of the products to justify their higher fees. Related to this, the following problems were mentioned: Evidence of an attractive risk-return performance in the long-run 28

29 Transparency (measurement of environmental, social and governance factors) Pragmatic and practical investment vehicles meeting pension funds needs (e.g. passive ESG investment strategies with low volatility and tracking error) The high fees associated with ESG investment vehicles currently available Risks associated with changes in government policy as seen in the solar industry One interesting observation is that most of the pension funds think they have enough internal know-how in terms of sustainable products, even though they haven t even started ESG investments. That might indicate over-confidence among pension funds for such new investments, although it may also be the case that the respondents did not want to appear lacking in knowledge and experience. For further research it may be necessary to frame this question more carefully. Empirical evidence vs. Public recognition Empirical evidence about risk return profile of sustainable investments would be appreciated by several pension funds. To accept ESG investments, at least the same returns are required as with traditional investment, without a higher risk. Such empirical evidence would enable asset managers to bring up ESG investments for board discussions. While it would take some time to collect consistent data for convincing performance of ESG investments due to their long-term nature, such evidence would be definitely useful. Another viewpoint observed in interviews is that, the lack of recognition of ESG investments in the public, rather than the lack of objective facts per se, is a challenge. Such a view could apply to all the new investment products, not only to sustainable investments: newness of an investment approach makes investors hesitant. However, it could be taken also as a great opportunity for sustainable investments: once there is recognition in the public, it would be likely to be widely accepted with a jump. Empirical evidence would be useful to trigger widespread recognition of ESG among the public, which indirectly influence the decisions of the board. Need for a new financial ESG benchmarks To implement ESG, we should give up, to a certain extent, our traditional benchmarks. We need to have different benchmarks for ESG investments. That is easy to say, but is difficult to implement Andres Haueter, Pensionskasse Post, Bern 29

30 According to the interviewee, since the performance of ESG investments cannot go too far from the traditional investments in terms of financial performance, we need to have a new benchmark to measure the risk-adjusted performance of ESG investments properly. In a way, investors are looking for a way to align the ESG investments closer with the traditional investments to make them comparable. A new benchmark would help this assimilation. Regulations As has been the case with family offices, most of the pension funds (14 out of 17) don't think favourable regulations would be a driver for ESG. While one clear reason is that regulations such as tax breaks are irrelevant for pension funds (no tax for pension investments), another possibility is that some of them, at least, believe that the driver of sustainable investments shouldn't be rooted in external factors such as the regulatory framework or preferable treatments. Rather, it should be driven by internal motivation such as sincere appreciation of financial returns combined with environmental and social considerations. On the other hand, current legal requirements such as the coverage ratio (to be above 100%) were frequently mentioned as one of the biggest If the coverage ratio goes below a certain range, they have to be refinanced, which is a painful process. It is clear that such regulation in combination with a difficult macro-environment lowers the degree of freedom for pension funds and thus postpones or currently prevents them to take new investments initiatives in general, which adds even more uncertainty. Barriers at the individual level Problems with terminology A problem with ESG investing is a lack of consistent and clear definition of ESG investments among investors. Some would assume that their financial returns would be sacrificed for the sake of ESG factors. Depending on the perception of ESG investments and their performance, the place for or the position of ESG investments in portfolio would differ substantially. An interviewee comments, There must be a place for such investments (considering the social and environmental impacts) as a side component. By contrast, a few pension funds think that ESG investments should be the core of their portfolio because of their superior risk characteristics. Here, we see that giving consistent recognition about ESG investments risk-return profile is a challenge to overcome. 30

31 Regarding the newness, a few interviewees mention that they feel uncomfortable with the very word sustainable investments : that such a word is in fashion suddenly and is in vain. Some think that the word is a convenient marketing label used for enticing investments, whereas no substantial differentiation made in terms of risks and returns. I have a feeling that many sustainable funds are marketing tools, which put blue chips together according to some criteria. If we look at the contents of such products, then, as an institutional investor, we have similar stocks in our portfolio anyway" Mariusz Platek, Pensionskasse Basel-Stadt, Basel We don t understand the term sustainable investments since there are so many different definitions. Werner Buchmann, Kantonale Pensionskasse Graubünden, Chur I avoid the term Socially Responsible Investments to other bankers, as they d assume this is a responsibility and involves sacrificing returns. The word chases them away. Anonymous interviewee, Zürich We observe a psychological barrier and scepticism with new terminologies as mentioned in the case of investments in green buildings. 26 It seems that quite a few ESG terms are associated with connotations non-favourable for traditional investors. Hence, re-working may be needed, either to have more clarity in general in terminology, or set up a totally new stream, to be accepted widely in the market. Fiduciary duty According to FNG s study, fiduciary duty used to be considered to be incompatible with SRI (socially responsible investments) because of the latter s willingness to sacrifice financial returns for social impact. However, most of the interviewees (11 out of 17) perceive ESG investing is not contradictory to fiduciary duty. 26 Hoffman, A. and Henn, R Overcoming the Social and Psychological Barriers to Green Building pp.13 31

32 It also depends on how to define the fiduciary duty: being a good citizen is part of the duty. So it is not a hurdle for ESG investments. Bruno Allmendinger, Sulzer Vorsorgeeinrichtung, Winterthur The definition of fiduciary duty depends on the country and its legislation. The broad trend in Switzerland is toward the acceptance of sustainability issues as a legitimate consideration by directors and even, increasingly, as an obligatory consideration 27. Barriers at the organizational level Need for board member education In general, the principal-agent problem affect the organizational decision making process at pension funds. For example, interviewees pointed out that training and education would be beneficial for the board of directors rather than for investment managers themselves. Another mentioned that they are waiting for a signal from the board to make the first step. The brochure of the UNPRI is still on my desk I haven t still brought it on the agenda for the board... The initiative should come from my side Andres Haueter, Pensionskasse Post, Bern This attitude of waiting for the right timing could lead to a chicken-and-egg situation, which in part explains the sluggish adoption of ESG investments. The investment team is waiting for a signal from the board to start discussing about ESG investments, whereas the board is not aware of ESG investing and its importance if the investment team doesn't feed the information to them. In the context of pension funds, how to influence the decision makers towards sustainable investments would be a discussion topic. Bias in decision-making As mentioned in the principal-agent problem, another problem arises from demography of the people on the board of pension funds. They are all aged and have a long experience in the company as well as in investments. They are more comfortable with traditional approaches and don't see the need for ESG investments, given their experience with investors solely being concerned about the financial returns. The relatively older and male-dominant 27 Generation Investment Management LLP, 2012, Sustainable Capitalism pp

33 board structure in Switzerland could in part explain the slow adaptation in comparison with Nordic countries with different demography of the boards. We can also expect that higher comfort with traditional investment approaches arising from a long successful career, such as ending up being on the board of pension funds, would lead to negative attitude towards new investment approaches including ESG criteria. The generation problem in pension funds could be one of the reasons of the inertia among the pension funds for adopting sustainable investments. It is like that: we are capitalists, not socialists! Christoph Müller, NEST Sammelstiftung, Zürich Another factor is that there is no proper reflection of beneficiaries demands on managerial directions. None of the corporate pension funds interviewed think the voice of their beneficiaries is important, due to (quasi-)obligatory membership to the corporate pension scheme. The situation is similar for public pension funds, due to the too diverse opinions and preferences of their beneficiaries and inability to satisfy everyone. None of them have done a survey among beneficiaries to see their preferences of investment approaches. Therefore, while the members of a pension funds could have more advanced preferences regarding the investment approaches, such preferences are not correctly reflected in their final decisions. Several interviewees (four out of eleven) at public pension funds mentioned that the shortterm assignments of directors of the board of public pension funds generate short-term performance focus, in addition to the requirements of annual reports and quarterly performance measurement. For example, at AHV and PUBLICA, the board of directors is a political body and their assignments are up to four years. The short-term assignments discourage the board from taking any new decisions about ESG investments, which take the long-term investment horizon and involves higher uncertainty. Even with the possibility of reelection as a board member, as far as their focus is on the re-election within four years, they won t have incentives to implement investments that generate returns over a longer time period. 33

34 Part V: Conclusions & Recommendations 5.1. Common Conclusions Both interview groups recognize that ESG investing is an important topic that is gaining momentum within the investment community. However, adoption still remains low for both groups, with varying reasons. For pension funds it appears that internal organization structure and decision-making is a hurdle to over-come, while as for family offices and asset managers, too much ambiguity with regards to definition and measurement in an uncertain environment play a role. In both groups, no one wants to initiate acceptance of ESG investments. For example, asset managers are reluctant before clients express interest in such investments, and in pension funds, there is a similar situation between board members and the investment professionals. Therefore, the awareness exists, but the asset owner/manager customer group is not yet fully convinced of the benefits of ESG investments, and therefore, feel cautious as early adopters. Regulation is not an external driver for ESG investments. Both interview groups state that involvement in such investments should be intrinsically motivated, and not be based on external incentives or requirements. The problem for external involvement is two-fold. For one, it sends the signal that these investments are not profitable on stand-alone basis, and therefore require such help. Secondly, external interference is seen as adding new uncertainties, as is the case with renewable energy government support. 5.2 Common Recommendations Peer-to-peer networking and knowledge exchange in conjunction with training. Both groups showed some interest in and would benefit from training sessions about ESG investments, as there were respondents in both interview groups who stated that further training would be beneficial. This could be done in conjunction with a networking event, where smaller focus groups could discuss their strategies with regards to ESG investments and how they have approached this. There may be some resistance from the independent asset managers and family offices, as they tend to be more secretive with regards to strategies and also clients. However, the younger 34

35 generations from family offices should be included due to higher propensity towards sustainable investments. Positioning Contrast Capital as a risk advisory manager, rather than as ESG investment advisory firm. It appears that respondents on both the pension fund and asset management side consider themselves to a high degree as risk managers, and therefore, it would be advantageous that Contrast Capital shifts its focus to help the clients manage the risk through its products versus positioning itself as ESG investment advisory firm. Furthermore, creating its own risk management label would help the company to separate itself from the confusing sustainable investment universe, and rather focus on a very small niche part. This would serve to make a clear distinction of its strategy as a risk manager through ESG investments, promoting its own framework, rather than relying on existing definitions, which currently only confuse potential clients. Develop a framework or benchmark to track performance of ESG investments. Based on the recommendation to position Contrast Capital as a risk advisory manager, the firm should develop its own framework to measure the level of risk management and impact. The firm needs to form its very own idea of what it means to manage risk, and how ESG factors can be a part of this risk management. Respondents stated that ESG investments should in fact be less risky than conventional investments and therefore, the current economic environment is the right entry point for those who consider risk management as primary objective. 5.3 Interview Group 1 - Family offices and Asset Managers Conclusions Although asset managers and family offices are aware of ESG investments or have previously been involved in the area of ESG investments, strong scepticism is associated with such investments. Only four of the interviewees have at least some of the portfolio allocated to ESG investments. Various reasons for low levels of adoption currently exist, and are expected to continue in the coming years, unless something fundamental changes in client demand of ESG investments. The problem it seems is that the fundamentals, such as a uniform definition and way to track the investments, do not exist. Without these very rudimentary concepts, asset managers find it very difficult to advise clients, as they do not understand it themselves. This 35

36 relates back to the fact that nine of the interview partners stated that transparency and the firm s ability to understand products or asset classes are a key to the firm s strategy. Therefore, ESG investments, which they do not fully understand, are automatically excluded from the allocation process. Lack of proper information and education about ESG investments appears to be a key driver behind the scepticism. Except for three interview partners, all respondents stated that they are confident that the firm has sufficient knowhow about opportunities and risks arising from ESG investments. However, given that five respondents (who were interestingly not the same as the ones admitting they have sufficient internal knowhow of ESG investments) stated that the risk-return profile is not as attractive in ESG investments as in conventional investments we can conclude that lack of proper information is an issue. Since studies show that returns from ESG investments are at least as attractive as from return perspective as conventional investments, it could be that investors simply do not have proper information and therefore, tend to dismiss ESG investments completely. Regulation is not an external driver for adoption of ESG investments. Although incentives, such as tax breaks on the gains of ESG investments were mentioned by two interview partners as potentially helping, regulation itself was not perceived as a way to promote ESG investments. According to six of the interviewees, ESG investments should be intrinsically motivated, and not due to external measures. This motivation should be two sided with wanting to invest in a sustainable way but also due to the economic factors. Government involvement in the solar energy business was mentioned as an example of government intervention, which can go wrong when the firms cannot survive without support. Asset managers and family offices wait for a client trigger to begin investing in ESG investments. This is the classic chicken and the egg scenario, where the asset managers do not want to promote any new strategies, unless the client asks for it, in fear of deviating from traditional strategies with unsatisfactory results. On the other hand, it may be that clients are not aware of such an investment approach, and wait for the asset manager to make the recommendation. This was also seen in the interviews where the interview partner stated that younger clients have asked for advice on recommendations for a sustainable investment. Therefore, the asset owners (wealthy 36

37 families and individuals in this case) are in charge of taking the first step into investing in sustainable investments. Uncertainty and doubts over the selected companies or funds real ESG performance rating and how to measure the actual ESG impact cause aversion to adopt ESG investment strategies. Respondents have a clear view that there is no true measure of the degree of sustainability of ESG investments currently. This was seen in all the interviews, and indicates that although performance is a concern to a degree, the inability to measure impact causes asset managers to exclude the investments from the consideration set. The current uncertain macro-economic situation is the primary concern for asset managers and family offices, and its impact on the firm s performance. Although topics such as environmental issues and ESG investments are on the mind, they are secondary, as the bigger issues with immediate impact have priority. Once the economic situation improves, people will have more time to consider other, longerterm factors. However, investment professionals are aware of the growing need and trend toward sustainability in all aspects of life, but the topic simple does not have sufficient share of the brain at the moment. The younger generations, who have inherited a significant amount of wealth from their families, are increasingly asking about ESG and impact investments. These generations feel guilty and somehow obligated to do some good with the large sums of money they did not work for. Furthermore, they do not have a set mind for investing the money, whereas the older generations have invested in the same companies for years, and find it very difficult to even consider anything else. Therefore, the younger generations, and especially women, are more tuned for ESG investments. However, it appears that philanthropy, which has been also lumped into the wider universe of sustainable investments, is more attractive, as it does not require monitoring and the sense of gratification is instant. Recommendations Organize peer-to-peer meetings for the Young Associates of Family Offices, who may have better affinity to ESG investments, to exchange knowledge and discuss opportunities. From the interviews, it appears that the younger generations are more conditioned for sustainable investments as a whole and therefore, it would be 37

38 beneficial to be able to target this group on its own, to raise awareness of alternative ways of investing. Hold seminars and educational courses for interested participants from independent asset managers and family offices on ESG investments. These seminars should provide the knowledge foundation that half of the interview partners expressed an interest in further information and education, which may help them make future decisions about opportunities in ESG investments. In conjunction, the firm should organize meetings with the major investment players in Switzerland in cooperation with other ESG advisory firms to discuss concerns, opportunities and risks. Begin sending an informational monthly/quarterly Contrast Update report via to prospects on what is happening in the area of ESG investments, highlighting success stories, best practices and performance indicators. This will help asset managers and family offices gain more understanding of ESG investments, and also to extinguish some misconceptions, such as performance risks. Develop an informational leaflet for asset managers and family offices about ESG investments for distribution to clients directly along with other materials. This may be the only way to reach true asset owners, since often family offices and asset managers state that a lack of mandate for ESG investments is an issue. Develop a framework for measuring the impact of ESG investments on the different ESG levels, and promote it for wider acceptance in the investment community or alternatively, collaborate with other sustainable invest advisory firm to develop framework. As the inability to measure the impact was mentioned by nine of the interview partners as a barrier by all interview partners in this group, this seems to be essential for wider adoption of ESG investments. Conduct a second study in a different geographic region, such as in the Nordic countries, to better understand why ESG investments have gained more momentum among asset owners and managers there. These insights would help the company understand the potential cultural, political, social and economic factors causing ESG investments to be popular in these countries. This should also include a cooperative partnership with a Nordic investment partner and share observations and best practices from the regions. 38

39 5.4 Interview Group 2 - Pension funds Conclusions Pension funds are long-term investors and they face the need to diversify and re-allocate their portfolio in the face of economic challenges. Especially public pension with larger assets funds have a higher propensity to invest in ESG investments. Hence, they need to be targeted with appropriate training and independent information. Large public pension funds could trigger wider acceptance of sustainable investments and influence other asset owners and asset managers in Switzerland. However, at the moment, the level of acceptance is low and sluggish as only a few players consider ESG seriously. As seen in the trend of some pension funds increasing investments in insurancelinked products, pension funds are keen for risk management, as a top priority. Hence the characteristic of better risk management of sustainable investments should be appealing to them, and should be a strong value proposition for such future clients. There is no public stakeholder pressure yet in Switzerland for pension funds to promote ESG investments. Even the largest public pension funds (potentially) exposed to the political agenda, media, NGO s and other stakeholder groups state that the public pressure, for now, is very low to negligible. The corporate pension funds have almost no external pressures at all, not even from their own beneficiaries. Regulation is not considered as an effective driver for ESG investments for pension funds. Most (14 out of 17) of the pension funds feel that ESG should be implemented by internally driven initiatives based on the perception that environmental and social considerations improve the risk-return profile, rather than by external pressures such as regulatory changes. ESG investments should be driven by internal motivations and conviction. To drive sustainable investments from internal decisions, it is necessary to influence the decision makers effectively. Here, there are challenges to overcome, such as organizational biases in decision-making as well as principal-agent problems. A direct engagement with decision makers on investment committees and board of directors is needed. 39

40 Recommendations Contrast Capital should start a networking forum between pension funds to promote peer-to-peer knowledge exchange about sustainable investments. That way, the company could establish a brand in the pension fund advisory market for ESG investments. It is better to organize small networking sessions for similar pension funds (e.g., corporate pension funds to corporate pension funds, public pension funds to public pension funds, French-speaking ones to French-speakers), rather than one big event for everybody. Pension funds would be keen to mix with similar peers, and would be more open to exchange opinions and information. The company could create a benchmark to track the performance of sustainable investments for the use of pension funds investments. This is a way to assimilate ESG investments towards traditional investments. Since the decision-makers in pension funds have mostly established their comfort with traditional investment approaches, it might be useful to adapt the measurement of ESG investments towards the more quantified approaches. Such benchmark would serve to justify ESG investments as part of their portfolio, featuring the superior risk-return profile. Transparency, practicality and pragmatism are the things pension funds would like to have to proceed further to incorporate of ESG metrics into investments. Similarly, advisory on active voting and engagement activities would be highly appreciated by pension funds as consulting service. Some pension funds that do engagement and active voting currently only do it through agencies (e.g., Ethos for Swiss companies) and would like to expand the horizon internationally. Moreover, the agenda for active voting is currently restricted to hot topics (e.g. the board compensation, dual role CEO/chairman), whereas they would like to expand it to diverse ESG issues. The company should explore the possibility of creating such services to cater to the growing needs. Signing of the UNPRI by the biggest public pension funds would change the ESG landscape in Switzerland and create momentum. The company, hence, should try to influence such key opinion leaders. A case study on the Brazilian pension funds and their sudden acceptance of the UNPRI among the key players would shed light on a possibility to replicate it in Switzerland. 40

41 APPENDIX 6.1 About Contrast Capital Contrast Capital is a Zurich-based independent advisory firm founded in 2011 by three partners to advise investors with regards to sustainable investing. The Company s strengths are: Ability to incorporate sustainability into asset owners asset allocation via analysing the investor s investment framework Expertise in developing investment policies and due diligence processes incorporating sustainability aspects Ability to incorporate sustainability topics directly into the asset owners investment strategies by integrating ESG investment research and data into the tactical side of investing, and also assessing third party data. The company also offers research services to foster change towards sustainability in investing. This is done via feasibility and market analysis studies for new investment vehicles for asset owners, asset managers and governmental and non-governmental organizations. The company s founding partners have unique experience and knowledge to leverage their position in the market for sustainable investing and have a highly flexible approach. Its ability offer highly tailor-made solutions for each client s needs

42 6.2 List of Participants Institution s name Pensionskasse der Rhätischen Bahn Pension Fund of Linde AG AHV Roche pension fund Sulzer Vorsorgeeinrichtung Pensionskasse Bank Vontobel AG Pensionskasse Bank Vontobel AG Nest Sammelstiftung Pensionskasse Post Pensionskasse des Bundes PUBLICA Nest Sammelstiftung Interviewee s name Urs Brunett, CEO Christoph Schlegel Head of Pension Investments Christoph Zimmermann, Senior Manager Urs Jaisli Head of investment committee Bruno Allmendinger Chairman of the Trustee Committee Andreas Nigg Rene Weber Christoph Müller Head of investment committee Andres Haueter Leiter Vermögensverwaltung Patrick Uelfeti Portfolio Manager Peter Signer Bereichsleiter Anlagen Asset under Management 500 million CHF 4 billion EUR 46 billion CHF 5 billion CHF 7.6 billion CHF 5 million -1 billion CHF 5 million -1 billion CHF 1.3 billion CHF 13.5 billion CHF 33 billion CHF 1.3 billion CHF Anonymous Anonymous 5 billion CHF Pensionskasse Basel- Stadt Kantonale Pensionskasse Graubünden Unilever Pensionskasse Berolina Versicherung sverein auf Gegenseitigkeit Mariusz Platek Economist, Investments Werner Buchmann Leiter Vermögensverwaltung Sybille Hartmann Geschäftsführender Vorstand 9.7 billion CHF 2.3 billion CHF 1.5 billion EUR Anonymous Anonymous 5.5 billion CHF Caisse de Prévoyance du Personnel de l'etat de Fribourg Claude Schafer Director 2.8 billion CHF Tramundo AG Anonymous 300mil-1bn CHF Marcuard Family Office Jurg Frey, Managing Partner 1bn-5bn CHF MVC Family Office Nicola Carcano, CIO 2bn CHF Type Corporate Pension Fund Corporate Pension Fund Public Pension Fund Corporate Pension Fund Corporate Pension Fund Corporate Pension Fund Corporate Pension Fund Public Pension Fund Public Pension Fund Public Pension Fund Public Pension Fund Public Pension Fund Public Pension Fund Public Pension Fund Corporate Pension Fund Public Pension Fund Public Pension Fund Independent Asset Manager Multi-Family Office Multi-Family Office Anonymous Anonymous Over 5bn CHF Asset Manager Palomar Asset Management Patrick Erb, Portfolio Manager 1bn-5bn CHF Parsumo Capital Jacques Stauffer, Founder Not disclosed KehrliZahnder Family Office Stefan Kehrli, co-founder 1bn-2bn CHF Independent Asset Manager Independent Asset Manager Multi Family Office/Indepen Date and location July 2, Chur July 3, Telephone July 3, Telephone July 5, Basel July 9, Winterthur July 10, Zürich July 10, Zürich July 11, Zürich July 12th, Bern July 12th, Bern July 16th, Zürich July 17th July 18th, Basel July 19th, Chur July 20th, Telephone July 30th, Telephone July 31st, Fribourg June 25 Zug June 26 Zurich July 4 Telephone July 4 Telephone July 5 Zurich July 6 Zurich July 9 Zurich 42

43 SEED Capital Belle Capital Verium Family Office Giorgio Blum, founder Michel Guignard, Managing Partner Matthias Huber, Managing Partner Approx mil CHF 2.5bn CHF Not disclosed Anonymous Anonymous Not disclosed dent AM Independent Asset Manager Independent Asset Manager Multi-Family Office Single Family Office July 9 Zurich July 11 Zurich July 12 Zurich July 17 Telephone 6.3 Interview Guidance Table of Content guidance for interviewer (note that not all questions will apply to each interviewee) 1. General Questions: Personal/business key facts (to be filled out either at the beginning or at the end of the interview) - 1 minute max 2. Investment Framework: Asset allocation, approach, research, decision making 15 minutes 3. ESG Investments: relevant for both current ESG investors and also for those who have not started 15 minutes 4. Barriers to ESG Investments: independent of your experience and knowledge on ESG investing 15 minutes 5. Closing Questions: clarifying reference and anonymity -1 minute max 1. General Questions 1a) What type of company do you work for? Family Office Multi-Family Office Independent Asset Manager Public Pension Fund Corporate Pension Fund Other (please specify: 1b) Where are the headquarters of your institution located? Switzerland Germany Liechtenstein 1c) What is the size of Assets under Management (AuM)? Sfr 300 million or less Sfr 300 million to 1bn Sfr 1bn to Sfr 5bn Sfr 5bn to Sfr 10bn Sfr 10bn to Sfr 20bn 43