Sustainable Investing: Connecting values with performance

Raised in the Swiss countryside, Head of Sustainable Investment Solutions within Julius Baer’s Investment Management arm Silvia Wegmann has always had a natural affinity for sustainability, long before anyone else was talking about it. She explains how her upbringing has shaped her outlook on life and how managing sustainable portfolios is aligned with her personal values.

Silvia Wegmann fondly remembers growing up surrounded by farmers in her close-knit rural community, in which an unwritten social contract ensured that people looked out for each other. Respecting nature around her and protecting the environment came naturally to her. Food waste was not an issue: if there were any leftovers, they were brought to the neighbouring farmer who used it to feed his pigs. She credits her upbringing with instilling in her an appreciation for how her food was produced. “Nowadays, most of us don’t have much of an idea of where our food comes from, how it’s made, what is in it, or the work that goes into it. It would be great if children were educated about this again,” she says.

Today, Silvia still lives in the Swiss countryside and buys locally-produced food from neighbouring farms as often as she can. In a sense, sustainability has always been a part of her life, even though it wasn’t a concept that was widely discussed until recently. It comes as no surprise then, that her career in finance would eventually lead her to managing sustainable investment portfolios on behalf of Julius Baer’s clients.

Staying curious
One quality that helps Silvia stay on top of the ever-changing social and environmental megatrends relevant to her role as a portfolio manager is her insatiable curiosity. “I’m interested in so many topics besides finance. This curiosity helps me because it gives me investment ideas. I’m curious about everything from farming to how tunnels are built or the technology behind waste-to-energy. For example, if I have the opportunity to go see how an incinerator works so I can learn what happens to my garbage bag after I put it outside every Monday morning, I’ll just do it.” She also reads – a lot. So this means that she frequently peppers her conversation with references to studies about the link between sustainability and financial performance, making her a strong advocate for sustainable investing.  

The pioneering client
Silvia’s own journey with sustainable investing started approximately thirteen years ago, when an existing client expressed an interest in reinvesting the proceeds from the sale of his company according to his very own set of criteria. As an entrepreneur, it was a matter of course for this client to anchor his firm’s corporate culture to environmental, social and governance criteria. Based on his own managerial experience, he was convinced that other companies that were managed according to similarly progressive governance practices would also find success. He therefore wanted to invest in companies with a corporate culture similar to the one he had nurtured in his own firm. 

If you lead a sustainable lifestyle, why not align your investment with your values?

But he had other requirements for his mandate as well: he wanted to exclude companies that were involved in weapons manufacturing, nuclear energy, tobacco and genetic engineering. Though few other investors were talking about such an approach to investing at the time, this was enough to pique Silvia’s curiosity. So she sought all available literature about this new approach to investing – which wasn’t much – and quickly realised that this client was on to something.

“It made perfect sense,” Silvia explains. “There are many imbalances in the world,” she continues, “There is war. People are starving. There are children working in very poor working conditions. There is climate change.” If companies are to succeed in such an environment, they have no choice but to address these environmental, social, and governance challenges both through their corporate practices and the products and services they offer. “Through sustainable investing I really found an opportunity to fight against these imbalances, and it mirrors my own personal values.”

Battling the misconceptions
But it hasn’t always been easy. Today there are still many misconceptions surrounding sustainable investing. “People think sustainable investing is green, irrational, intangible,” Silvia explains. In fact, the opposite is true: “Sustainable companies are more innovative. They are the ones who have the products in place to address our challenges, and if you have the better and more innovative products, you have higher margins.”

Sustainable companies are more innovative.

Others believe that sustainable investing is only about investing in certain niche sectors, such as renewable energy, which may be out of favour in certain market environments, leading to missed opportunities or worse, underperformance. “But that’s another misunderstanding. Sustainable portfolios do not detract from performance because we invest in a broad equity universe or bond universe. We include all kinds of sectors and we try to find the best company within each sector in terms of its environmental and social behavior, but most importantly its governance.”

Super G
The essence of sustainable investing is incorporating environmental, social, and governance (ESG) factors into investment decisions. But Silvia explains that without Governance, you don’t have the ‘E’ and the ‘S’. Companies with strong governance recognise the importance of managing risks and opportunities associated with environmental challenges such as climate change, or social challenges such as shifting consumer attitudes, digitalisation or a changing regulatory environment. To prove her point, Silvia cites a London-based impact investing company: “In every region – the US, Europe and Asia – companies with poor governance consistently underperformed the market over a five-year period.” Equally important, she continues, “integrating ESG factors result in a better risk return profile for the portfolios.”

A personal connection
One of Silvia’s favourite aspects of her role as Head of Sustainable Investment Solutions within Julius Baer’s Investment Management arm is that it allows her to establish a more personal connection with her clients. Meetings typically go beyond a simple review of portfolio performance and risk. Clients will ask pointed questions about specific companies, their corporate practices, their products and how they contribute to society and the environment, resulting in spirited discussions on a wide range of topics that both Silvia and clients are passionate about. “Clients may have read something good or bad that a company has done,” Silvia explains. “They will say: ‘You have this company in the portfolio – tell me why.’ These types of conversations allow me to get to know clients much better because they are essentially talking about their convictions and values.”

Integrating ESG factors results in a better risk-return profile for portfolios.

Millennials lead the way
Despite lingering scepticism, interest in sustainable investing has grown considerably over the last few years, especially given the sense of urgency surrounding climate change and social issues such as labour rights. It tends to be more popular among women. Typically within the same family, it is the daughters who gently nudge their fathers toward sustainable investing. Or in the case of an inheritance, the sisters are the ones who will convince their brothers. But according to Silvia, “Millennials will take sustainable investing from niche to mainstream because they care deeply about these topics. Millennials and their children are the ones who will be most directly impacted by our global challenges.” 

Millennials will take sustainable investing from niche to the mainstream.

Sustainable Investing: Why not?
Still, there is much room for improvement. Silvia cites another study in which investors were asked about how they were incorporating sustainability practices into their daily lives. Seventy-eight per cent of the respondents stated that they recycled glass, separated waste and bought locally-produced food. But only 20 per cent actually translated this into their investments. “So my question is, if you lead a sustainable lifestyle, why not align your investments with your values? For me it’s a no brainer. With sustainable investing, you can achieve financial returns, and at the same time, you can put your money to work for something meaningful.”

But Silvia remains optimistic and hopes to continue to convince investors about the benefits of sustainable investing, one client at a time. Her proudest achievement? That her very first investor in her sustainable investment strategy remains a loyal client to this day.

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