A striking indication of ESG’s importance in Switzerland is that Ueli Maurer, the country’s president, will be the keynote speaker at the Swiss Sustainable Finance (SSF) annual conference in Bern. The organisation, which celebrates its fifth anniversary this month, has more than 120 members including asset managers, service providers and pension funds.
Switzerland was among the pioneers of socially responsible investment (SRI) in the 1990s. In the succeeding years it lost ground to other European countries. Apart from some pioneers, its pension funds were historically reluctant to focus on the topic given other challenges such as negative interest rates.
However, more recently, considerable innovation has become evident in ESG research, investment products and strategic integration. Pension funds have belatedly embraced sustainability. A survey by Complementa, a consultancy, found that 55% of over 400 pension funds surveyed saw sustainable investing as a fiduciary duty.
The Swiss Association for Responsible Investments, (SVVK-ASIR) was founded in 2015 in a bid to encourage ESG investment on a voluntary basis rather than through further regulation. SVVK-ASIR’s new guidelines, published in March, focus on carbon risk management. Within the engagement process, SVVK-ASIR will ask companies for climate-related reporting in accordance with standards set by the Task Force on Climate-Related Financial disclosures (TCFD). The TCFD is an international initiative launched by the Financial Stability Board. Other possible actions mentioned in these guidelines are climate change risk management, proxy voting, divestment, positive impact investment and review of participation in capital increases by companies.
Another milestone was the publication of a briefing by the Swiss Pension Fund Association, ASIP. In its updated guidelines for asset management published in July 2018 it recommended the consideration of ESG and climate risks in investment strategies.
Last but not least, WWF, the conservation organisation, published a pension fund rating study in January. The report only covered the 20 largest Swiss Pension Funds ranked by assets under management. The leaders identified were the pension fund of Bern, CPEG in Geneva and the City of Zurich pension fund. Others with positive ratings included Publica, the cantonal pension funds of Zurich and Vaud and the Migros Pensionskasse.
Many other pension funds are in the process of strategically implementing sustainability in a systematic and professional manner in their business activities. This contrasts with the situation five years ago when sustainability had a low priority on the agenda of most trustee boards. At that time, the approach was not yet as holistic as today but has rather focused on negative screening and isolated investments in microfinance or renewable energy.
All these developments demonstrate how dramatically the sustainable investment landscape has changed in Switzerland since 2014. But the sharp increase in sustainable assets has caused opponents to express their views more vehemently. The biggest Swiss political party, the centre-right Swiss People’s Party (SVP), is trying to position itself as against “carbon hype”. One of its representatives, Toni Bortoluzzi, is president of the Vorsorgeforum (an online occupational pensions forum). The organisation publishes a weekly newsletter and is an opinion leader in the industry. The forum’s managing director and journalist, Peter Wirth, uses the platform to oppose the pressure to give more weight to sustainability. In a 1 April editorial he argued, for example, that fossil fuel producers would not face profitability risks in the short term and he consequently criticised fossil fuel divestment by pension funds.
Investment consultants, with some exceptions, have also been laggards when addressing sustainability issues with their clients. A more pro-active approach is required if they want to defend their important role as advisers in the investment committees of pension funds in the future.
What are the trends for the near future? I expect three main ones.
First, I expect pension funds to address the ESG topic in a broader sense. Overall, this means that ESG should cover the asset and the liability side (for example, pension plan solidarity) as well as business operations. Many pension funds, like other institutional investors, have started with equities when introducing sustainability criteria. However, strategic implementation of ESG has to cover all asset classes, if applicable, to be credible. One area with a large potential impact is real estate, which accounts for about 25% of pension fund assets. But it also has to be admitted that trade-offs between short-term performance and sustainable requirements do exist in practice.
Second, ESG reporting will become key to serve the needs of different stakeholders. The millennial generation, for example, is supposed to be more interested in knowing what happens with its savings from an ESG perspective. It would also be desirable to have a systematic, periodic ESG risk-reporting framework which encompasses all relevant sustainability issues and relies on standards such as those set by the TCFD. This will encourage investment committees and trustee boards to take strategic decisions and to monitor the progress of their actions.
Third, larger pension funds will try to insource ESG capabilities through hiring ESG specialists and applying sophisticated research tools. This has happened with some of the largest pension funds already, although others are lagging behind with a knowledge base that remains insufficient. A broad range of conferences and education possibilities is also now available to increase the knowledge of trustees and other pension fund representatives.
Finally, Swiss pension funds will be also influenced by developments in the EU, such as the EU taxonomy, MIFiD regulation and reporting standards set by specialist bodies. The race among countries to lead the drive into sustainable finance has been relaunched. Swiss asset managers, service providers, academics and pension funds look set to demonstrate high quality and innovation in sustainable investment solutions. Two characteristics Switzerland is already famous for in many other sectors.
Beat Zaugg, CFA, is a specialist in ESG integration