Things are changing. As our Head of Wealth Management Solutions Nicolas de Skowronski explains: “In the past, as long as our investments delivered a decent return we didn’t necessarily question how that had been achieved. Life is not like that anymore. We now want to know precisely which businesses our money is invested in, and we want to ensure that our investments are in line with our personal convictions.”
What is responsible investing?
Investments have the power to contribute to far-reaching change – whether it be for better or worse. With responsible investing, all aspects and perspectives of investments are considered. A holistic responsible investment approach helps you to better understand the risks and opportunities within an investment universe. A key way of estimating how responsible your financial decisions are is with an ESG framework.
What is ESG?
Understanding responsible investing – and how to utilise it in your own portfolio – means getting to grips with ESG. This stands for Environmental, Social, and Governance. These have become the core building blocks of estimating responsible behaviour in corporations, investment strategies, and more.
ESG describes data that goes beyond the usual economic and financial perspectives. There is an ever-growing amount of information that sheds light on environmental, social and governance aspects of businesses. This data provides an additional perspective that sharpens our understanding of what we are truly invested in.
- Environmental: How does a company affect the world physically – does it appropriately manage its waste, its effect on biodiversity, and its greenhouse gas emissions, among other things?
- Social: How does a company handle the social side of its operations – for example, does it consider its effect on communities throughout its entire supply chain, and put in place policies to ensure a just workplace for employees?
- Governance: How does a company deal with ownership and oversight – is it committed to fair, transparent corporate ownership and governance structures?
Why is responsible investing relevant?
A cultural shift towards acting with purpose, increased regulatory responses for all aspects of ESG, and a desire for risk-adjusted returns mean that responsible investing is front of mind for many. What are the key drivers that make it so relevant for investors?
- Performance
Evidence suggests that ESG-focused companies fare better economically in the long run, which is mirrored in financial markets by better risk-adjusted returns. - Purpose
Awareness of humans’ global responsibility has become 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 sense of purpose is also spilling over to the investment world, changing the way investors make 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 ways that are free of negative effects. - Regulation
Even before the pandemic, companies were already facing significant pressure from regulators to become 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 Nations’ Sustainable Development Goals (UN SDGs), and the pressure to do so is set to increase.
How can we estimate how responsible an investment is?
At Julius Baer, we believe that a robust ESG methodology can help investors to appropriately manage their influence on the world. That’s why we have created a data-driven and thorough framework to estimate ESG strengths and weaknesses in financial instruments. Using a screening process, our own thematic research, and a set of ‘Julius Baer Scores’ – touching on aspects such as climate, natural capital, human capital, and governance – we can estimate if a company is an ESG risk, a traditional investment, a responsible investment, or one step further – a sustainable investment.
Why do we believe responsible investing is important?
Our CEO Philipp Rickenbacher sees responsibility as a long-lasting catalyst of change in the finance world. He told our Wealth Insights podcast: “Financial services is a key stakeholder that can help to drive change moving forward – together with politics that set the framework conditions, together with companies that pollute and that have to change, and together with educated consumers who will influence the direction of consumption.”
So how does our CEO see wealth management helping to create a more responsible society? “It’s about understanding the implications of our choices,” he explains. “It’s about understanding not just the financial returns and the financial risks of our investments, but also the externalities, the additional factors and maybe the collateral damage that is created through it.
“And then ultimately having the right means to implement this through the right investment solutions. This is what responsible wealth management is all about.”
How can you start investing responsibly?
Choosing a responsible investment approach can be a very personal decision. It’s important to evaluate your own goals, resources, networks, risk appetite, and values. With this information, you can begin to decide what type of responsible investments work for you.
So where can you begin? Our Head of Sustainability Yvonne Suter told our Wealth Insights podcast: “I would say that the starting point is really to identify what matters to you as an investor, to identify your values, your ambitions and of course that can vary.
“It can be for instance, protecting the ocean and restoring marine life or it can be providing better access for the poorest in the world to education or healthcare for instance.
“And then the second question to be asked by an investor is really what is the role they want to play? And there’s a whole range of investment solutions available these days. You can start with considering ESG factors in your investment decision.”
She explains: “Sometimes it can be rather challenging for an investor to identify what matters to them, to identify the role they want to play as an investor. All this terminology, these different investment strategies, can be rather be a complex landscape. So what might help in this situation is that you try to get access to thought leadership, meaning insights into global challenges and how to possibly resolve them.
“Another thing is that you can get transparency on a portfolio level that you see to which extent your investments are in line with your personal values and ambitions. And finally, it’s also about sharing experiences with like-minded investors.”