Sustainable investing: paths to progress
In an open forum, we gather the thoughts of Dominik Scheck, Head of ESG at Credit Suisse Asset Management Switzerland & EMEA, on the integration of ESG factors into the investment process.
In September 2019, Credit Suisse Asset Management announced that it was going to integrate environmental, social, and governance factors – the ESG1 factors – into the investment process of all traditional asset classes in Switzerland and EMEA by the end of 2020. What was the rationale behind this decision?
The rationale is that our portfolio managers have a rich set of tools at their disposal for making better-informed investment decisions. There are a number of cases where ESG research has clearly indicated ESG risks associated with a specific company, or that a particular company is an ESG leader and has outperformed in recent months and years. The data leave little room for doubt: companies that achieve ESG excellence exhibit improved performance and enhanced resilience.2 This dovetails with investors’ rising expectations for products aligned with their values, as well as with our awareness at Credit Suisse of the responsibility we bear toward society and future generations, which is the source of our company-wide commitment to sustainability.
The data leave little room for doubt: companies that achieve ESG excellence exhibit improved performance and enhanced resilience.
Could you say some more about the progress made so far and further plans?
At Credit Suisse Asset Management, we have been making tremendous strides in the integration of ESG factors into investment processes within Switzerland and EMEA. We are approaching the milestone of CHF 100 billion in AuM verified for ESG compliance based on the criteria set out in the Credit Suisse Sustainable Investing Framework. During the last few months of 2019, we also began implementing our engagement strategy with selected portfolio companies.
More broadly, we are transitioning from ESG Framework 1.0 to 2.0 with respect to the application of newly defined exclusion criteria. On the proxy voting side, we are working for the first time with an external partner, ISS, to increase coverage by defining a regional proxy voting policy for Europe. Additionally, we are developing regional voting policies for APAC and North America, with the objective of increasing our coverage universe to these two regions in 2021.
What distinguishes the Credit Suisse Asset Management approach to ESG and investment selection?
The overarching principles of our sustainable investing approach are that it is comprehensive, holistic, and transparent. By comprehensive, we mean that it is applied consistently across asset classes, investment styles, and investment profiles. The holistic aspect involves the use of a diverse range of methods at different points throughout the investment process, while transparency is provided through ESG fact sheets and dedicated ESG reporting.
When selecting investments, we follow the Credit Suisse Sustainable Investing Framework, first defining the investment universe by excluding sectors and companies that are out of step with our values. We then engage in a rigorous review of financially material ESG indicators in combination with financial analysis to identify promising investment targets. Additionally, we provide a range of tools and building blocks to serve our clients with solutions tailored to their individual ESG preferences.
What impact does the exclusion of certain sectors and companies have on performance?
I think the question is based on a false premise. As awareness grows of the challenges facing the global economy and society in general, the appetite for a “quick buck” has given way in most corners to the pursuit of sustainability. Exclusions ensure we systematically avoid exposure to controversial areas or companies involved in unethical conduct. By combining values- and norm-based exclusions with an ESG integration approach that gives greater weight to ESG criteria that are likely to exert a positive impact on risk-adjusted investment returns over the long run, we ensure that the positive effects on performance outweigh.
Considering the gravity of the challenge posed by climate change, much focus in sustainable investing is naturally placed on the “environmental” in “ESG.” That said, where has Credit Suisse distinguished itself in terms of social and governance aspects?
Our 2019 Active Ownership Report details the extensive work Credit Suisse Asset Management does on governance matters. We regularly engage senior management of selected investee companies in dialog to help them chart a path toward more sustainable and transparent business practices. At the same time, we use proxy voting as a means of ensuring that shareholders’ voices are heard.
From a social perspective, multiple investment products from our offering aim to contribute to achieving the UN Sustainable Development Goals (SDGs). One example is a fund focused on educational technologies, which frequently facilitate distance learning, and therefore advance the fourth SDG of quality education. In addition, Global Real Estate engages in projects in developing countries that offer decent work and economic growth, create sustainable communities, and supply affordable and clean energy. These impacts map directly to SDGs 7, 8, and 11.
Sustainability will remain the core of credible and successful sustainable investing strategies that investors show no signs of abandoning.
ESG is now an important consideration for most market participants and we are a long way from how it was viewed five or ten years ago. Will this trend toward sustainable investing continue in the current COVID-19 crisis? What is the outlook for sustainable strategies in the current investment climate affected by COVID-19?
Sustainable investing is no longer a trend per se, but has rather become the dominant paradigm. While the short-term impact of the COVID-19 crisis on markets has been hugely negative, its medium- and long-term implications are only beginning to crystalize. What is certain is that climate change will remain at the top of the agenda, and public sector investment in environmental sustainability is set to accelerate as a means of economic bounce. Insofar as sustainability is still, despite COVID-19, an imperative for the viability and growth of companies, it will remain the core of credible and successful sustainable investing strategies that investors show no signs of abandoning.
Could you give us an example of a unique ESG solution?
The latest addition to our range of sustainable offerings is the Credit Suisse (Lux) Environmental Impact Equity Fund. This is an innovative offer focused solely on investing in impactful companies with genuine solutions on hand to generate a measurable and sustainable positive impact on the world’s most pressing environmental challenges. The ESG criteria based on the Credit Suisse Sustainable Investing Framework are naturally a pillar of the fund’s investment process. By looking beyond companies with mere sustainability policy papers and honing in on those businesses offering products, services, and technologies with a real environmental impact, the fund will also increase diversification in most investors’ portfolios. Investors will be able to track the impact made over time and the fund’s exposure thanks to annual impact reports.