Are loyalty shares a game-changer?
Nina Roehrbein asked Mirjam Staub-Bisang about sustainable investment in Switzerland
Nina Roehrbein: Why does the asset management industry in Switzerland appear to be ahead of its pension fund counterparts on sustainability?
Mirjam Staub-Bisang: A study I undertook on the pension funds of Swiss corporate sustainability leaders such as Sygenta, Zurich Insurance, Swiss Re and Nestlé revealed that none of their pension funds formally apply sustainability criteria to their investment process. The most commonly quoted reason for this is that they believe sustainable investment comes with lower investment returns. This – wrong – assumption goes back to the fact that following aggressive marketing, many Swiss pension funds invested in solar and other renewable energy stocks some years ago and burnt their fingers. This has left the boards of trustees thinking that sustainable investment does not work for them and will hamper returns.
People unfamiliar with sustainable investing have a very narrow view of what it is. If investors cannot be persuaded that returns are at least as good or better in the long term, there is not going to be an uptake of sustainability by investors. Studies that prove the added value of integrating sustainability criteria and show that responsible investment funds perform better over one, three, five and 10 years, such as a recent study by the Australian Responsible Investment Association, need to trickle down to the individual trustee. A white paper, meanwhile, has identified sustainable investing as one of the six pillars of growth for Swiss asset managers, which are currently in turmoil over undeclared taxes, competition and regulation.
NR: Such studies are easy to look up these days. What are the other barriers to sustainability?
MSB: The simple answer is that it is tedious to familiarise yourself with a new topic.
Another problem is that pressed-for-time pension fund managers ask consultants for investment advice. And consultants are one of the main reasons for the lack of sustainability investing because they tend to have a very negative view on the issue.
Consultants cannot just look up sustainability data on Bloomberg and put it into a report – it is more about qualitative issues and requires a different thought process. Sustainable investing is also about the long term. If you issue a short-term mandate, you cannot issue a sustainable investing mandate because sometimes it takes several years until such a strategy shows its value. Consultants, however, are opposed to long-term, 10 to 30-year mandates because it is part of their highly remunerated business model to reassess fund managers on an annual basis and suggest a search for a new manager after three years if the fund manager underperforms. In other words, there is an inherent conflict of interest.
Ultimately, it is governance – leadership from the top – that is the key to integrating sustainability. If the board of trustees truly believes sustainability adds value, it is able to push this through all the processes and implement it in the investment strategy.
NR: What is happening with sustainability in Switzerland now?
MSB: The backing of the Minder Initiative will change the investment behaviour of pension funds in Switzerland. As of next year, pension funds will be forced to vote on governance issues and on the management and board compensation in all their domestic shareholdings. Having to vote means they will have to start thinking about the long-term effect of certain decisions. This will lead pension fund managers and boards of trustees to consider sustainability issues, especially if they rely on the advice of proxy advisers. Many Swiss pension funds hate the Minder Initiative. They believe it will cause too much additional work and comes at a large extra cost. The truth is it is not that expensive.
I believe another big push for sustainability will come from integrated reporting initiatives such as the Sustainability Accounting Standards Board (SASB) and the G4 Sustainability Reporting Guidelines of the Global Reporting Initiative (GRI). Integrated reporting will make it easier for investment analysts to see material non-financial, off-balance sheet data. If it is material and likely to have an impact on the performance of the company, they will integrate it in their analysis and investors will consider it.
NR: Does the sustainable and responsible investment movement need regulation?
MSB: Pension fund managers are too passive by nature, which is why voluntary sustainability initiatives do not work very well. Therefore, while I am profoundly against more regulation of the financial markets, threats about regulatory measures will accelerate much needed change. South Africa’s King Code, for example, which obliges pension funds to include sustainability criteria in their investments, has pushed the industry forward there. And I think that the implementation of the Minder Initiative will lead to more progressive investment behaviour in Switzerland in three to five years’ time.
NR: Instead of regulation, is there any way to incentivise pension funds to integrate sustainability?
MSB: One way is with loyalty shares, offered by some French firms. This means companies such as L’Oréal and Michelin pay extra dividends to long-term investors. Pension funds that are in it for the long run find this attractive because they know they will get a better return. We discussed this in Switzerland but it did not lead anywhere, mainly because under Swiss law all shareholders have to be treated equally. Companies welcome the idea because they prefer long-term shareholders to those who are in it for a short trade.
Pension funds that make loyalty shares a core holding are likely to assess the stock from a long-term sustainability and corporate governance perspective because they would receive the loyalty premium only after at least five years. They would, for example, have to look critically at the entire extractives industry because potential risks, such as taxes on CO2 emissions and oil reserves, which may turn assets into liabilities, may manifest themselves over that period. The key word here is stranded assets. Loyalty shares could be a game-changer for sustainability.
NR: Can sustainable pension funds invest in all asset classes?
MSB: A sustainable investment approach can be followed in most asset classes. Pension funds with a sustainable strategy should stay away from quantitative trading strategies, unless they are careful in their asset allocation. Most hedge funds are not very sustainable because they are all about short-term trading, especially quantitative trading strategies, in which there is no added sustainability value. Activist strategies, however, can improve the governance of their investee companies for the long term.
Commodity futures always involve speculation about prices going up. This has proved to be a problem, especially for soft commodities, as highlighted by the tortilla crisis when commodity prices for corn were driven up by the demand for biofuels. Investing in commodity shares with a best-in-class approach is a sustainable investment approach as preference is given, for example, to mining companies with strict environmental and social standards that focus on health and safety and the impact on the local community.
Infrastructure investments, on the other hand, including renewable energy investments, help to build economies. This is good for society and the environment. In addition, they produce solid, long-term returns for investors.