Why is responsible investing relevant?
When talking about the growing relevance of responsible investments, three key drivers can be identified:
- Performance
Evidence suggests that ESG-focused companies fare better economically, which is mirrored in financial markets by better risk-adjusted returns. - Purpose
Sustainability is a structural force, a shift in our society’s mindset. With the help of technology and social media, consciousness about environmental preservation, climate action, and social responsibility has grown. This change in people’s mindset and values is also spilling over to the investment world, changing the way investors make investment decisions. We see that today’s investors are seeking to achieve not only a financial return, i.e. a profit, but also to channel their wealth in a way that makes a difference in areas that matter to them – a purpose. The consequence is an increased reward as doing well and feeling good come together. While the former is objective, the latter is subjective. - Regulation
This is probably the one that is currently gathering the most momentum. Even before the pandemic, companies were already facing significant pressure from regulators to become more sustainable and more responsible for their actions. The corporate and finance world have key roles to play to support common political visions such as the Paris agreement or the United Nation’s Sustainable Development Goals (UN’s SDGs), and the pressure to do so is set to increase. The European Union’s sustainable finance and taxonomy efforts serve as a good example.
These three drivers underpin the relevance for us as a wealth manager. Our CEO, Philipp Rickenbacher, sees responsibility and sustainability as long-lasting catalysts of change in the finance world and states that “we truly strive to understand the world and to make meaningful and impactful decisions for the future, strongly so through sustainability. Finance can indeed change and sometimes even save the world.” Responsible investing marks a key theme of this decade’s secular outlook framed by our CIO Yves Bonzon. Both examples underpin our strong belief that responsible investing has become mainstream and will continue to shape the future of finance.
What is Julius Baer’s responsible investing approach?
Our investment process integrates the ESG perspective and has done so for many years. It has been and continues to be a journey of learning, refining, and extending. We believe that creating value sustainably requires a focus on cash flows and profits, and on responsible interactions with society as a whole. ESG is a toolset to better manage risks and generate long-term returns. We also believe that every individual has their own personal point of view, reflecting values and beliefs, and thus holistic wealth management should not make any moral judgments on behalf of investors. Moreover, financial markets always put a value on assets and to be mindful of valuations is key for performance. At a certain point, ESG risks can be adequately priced, in the same way ESG opportunities can be overpriced from a conscious investment perspective. Our approach to ESG integration focuses on risk and opportunity identification, raising awareness, increasing transparency, and avoiding exclusions. The responsible investing process is part of a holistic responsible wealth management framework, complemented by philanthropic services:
1. We screen our universe with ESG data sourced from independent providers
Each objective, spotting ESG laggards/leaders, or instrument that serves a specific purpose, has its own methodology (a set of criteria).
2. The Responsible Investment Committee validates the data signals
While all ESG risk cases are subject to validation, only specific ESG opportunity cases need to be validated. The committee engages with the experts to understand how the ESG perspective is embedded in their assessment. The validation confirms the instruments’ specific characteristics. So-called ‘red flags’ identify ESG laggards and meaningful risks. ‘Sustainable’ as a characteristic defines ESG leaders that show sustainability in their products and services and responsibility in their business practices. ‘Impact’ identifies instruments that seek to generate both a financial return and measureable positive impact on society or the environment. The remaining companies are defined as ‘responsible’ given the ESG integration process.
3. The alignment of instruments to individual preferences and means
An investor’s objective tends to reflect different takes on sustainability. While ‘sustainable’ instruments can be core building blocks of a diversified portfolio, ‘impact’ instruments are rather satellites. Philanthropy brings the highest degree of a “do good” element, but it is a service, and not a financial investment.
The final selection is straightforward; only instruments with a positive recommendations make it to a portfolio. The reward to investors is both in the sense of doing well, i.e. the high likelihood of long-term performance, and of feeling good, i.e. emotional benefits due to the alignment of the portfolio with personal values and beliefs.