ESG Advisory

Take, for example, a company that for cost reasons ignores the environmental pollution it is causing, but later is required to rectify the damage, at great expense. Factors like this can have an impact on future profitability, potentially reducing share prices and dividend payouts.

“Companies that recognize and tackle the environmental risks associated with their activities can secure a competitive advantage for themselves in the long term.”

Simon Fössmeier, Senior Equity Analyst ESG

“If companies only see society as made up of potential customers, they run the risk of disregarding important aspects of social sustainability.”

Ulrike Theus, Investment Advisor ESG

Businesses today are expected to respond to social trends and even political dynamics.

• Decisions that respect the impact on different population groups enhance a company’s public image, increasing consumers’ preference for the company and reducing the likelihood of boycotts. Recruiting new employees is also easier. And where employee satisfaction is high, it is not uncommon to find productivity and value creation improving as well.
• Political dynamics can affect markets, production, and supply chains Companies that do not jeopardize a society’s need for security or are less likely to be caught in the crossfire of geopolitical interests, have an advantage here.

“Inadequate governance can become the root cause of a global scandal.”

Lukas Wäger, Head Private Clients ESG Center

A company is not only kept on the right track by its people, but also by its established processes, structures, and control mechanisms. The term “corporate governance” takes this constellation into account. How does a company decide what is right and what is wrong for the company? What principles are even subject to a company decision in the first place?

For example: Should financial returns be maximized for shareholders? Or should customers, employees and the community equally benefit as well?

A company’s ability to prioritize and balance risks and business opportunities depends, among other factors, on its corporate governance.  

While there are many different providers who issue ratings for individual securities and funds, they do not all consider the same factors—and thus they may not arrive at the same ratings. This means there is a risk that the specific criteria that are important to you as an investor might not be adequately covered.

This is why it makes sense to discuss making targeted investments in individual equities with an ESG expert. This way, the information basis for a decision can be broadened and, if necessary, expanded with in-depth research.

ESG is not always a top priority on investors’ agendas

Many of the issues that an ESG framework focuses attention on are structural megatrends. Climate change is an example of this. Along with other megatrends, it will still be relevant ten or fifteen years from now. However, some market cycles play out in such a way that a specific megatrend may not be at the top of investors’ agendas; other events of global scope take center stage. This leads to fluctuations in ESG investments. The war in Ukraine and the COVID pandemic are the most recent examples—with negative and positive effects respectively.

For Vontobel, ESG investing is based on an ESG framework¹ that is made up of three ESG preferences with varying levels of stringency regarding ESG criteria. You can select the right strategy for you from three defined ESG preferences:

“Risk-adjusted performance”

This ESG preference takes financially material ESG risks relating to performance optimization into account without pursuing explicit ESG goals. It offers a broad investment universe, so is particularly well-suited to clients with a greater focus on performance. We integrate these minimum standards into all our mandates.

“Mitigation of negative effects”

This standard factors in sustainability-related risks while at the same time excluding certain sectors and companies—such as those in the fossil fuel industry. With this ESG preference, you will not invest in companies that have adverse environmental or social impacts. If you want to avoid investments in sensitive sectors, such as tobacco or conventional weapons, this is taken into account by default. This investment strategy is value-based and aims to reduce negative externalities. Sectors, industries and activities that do not align with our values or ethical criteria are excluded.

“Positive contributions”

This ESG preference incorporates all the indicators previously outlined. and places the emphasis on investments in companies with positive impacts on the environment and society. It is based on the United Nations’ Sustainable Development Goals (SDGs). The “Positive contributions” preference has stringent indicators that all investments and products must meet, which limits the investment universe accordingly.

¹ The ESG Framework is currently only available to clients outside the EU/EEA.

ESG preferences at Vontobel

An ESG rating always takes all three dimensions into account, i.e., risks relating to the environment (E), social issues (S) and governance (G) that could have an influence on the financial performance of a company. Here, the ESG rating focuses on how well companies can deal with ESG risks. Further considerations, such as the transformation into a more eco-friendly business model or the impact of climate change, are not taken into account.

In addition, many ratings agencies weight E, S and G differently, depending on the industry. In the case of financial equities, for example, environmental risks are less of a focus than in the case of industrial companies. How useful this weighting is, also depends on how much it corresponds to personal convictions. The topic is accordingly controversial¹—especially when companies cannot be clearly assigned to one particular sector.

In our Swiss Equity Research, the Vontobel ESG rating gives equal weight to all three dimensions. This makes it easier to compare different securities. It also takes into account the fact that good environmental risk management is hardly possible if the company is not managed well overall, or if the social risks of its activities are not minimized.

Thematic funds also exist that specialize in social or environmental issues. Accordingly, they are focused on E or S.

¹ The Economist (July 2022): Special report “The signal and the noise” (registration required).

Yes. However, “making a difference” is interpreted in different ways and often misunderstood. In the strictest interpretation, only “impact investing” aims to achieve an effect that is consistent, comparable and measurable. Impact investing in this sense refers to the provision of capital for small companies that stand out because they make a positive impact on the environment or society. Often, progress towards the United Nations’ 17 Sustainable Development Goals is cited as a required aim in order to count as an “impact.”

However, the misconception that ESG investing is automatically impact investing stubbornly persists, even in Switzerland.²

Although investment opportunities in the field of impact investing are growing rapidly, they remain limited in scope as the minimum amounts are high and the liquidity of such investments is very low. For this reason, many investors decide to initiate smaller-scale portfolio improvements by taking ESG criteria into account and therefore, for example, excluding sectors and companies that do not align with their convictions.

Another interesting point on this topic

In its publication titled “Impacts and risks associated with current investment behavior”, the Federal Office for the Environment (FOEN) investigated “how effective” taking ESG criteria into account actually is. The conclusion is cautiously positive, though it does emphasize that “many individual decisions can add up to a larger effect.” Verbatim, the authors’ summary includes the following:

“The review concludes that (1) ESG ratings can reflect company impact when they focus on impact materiality rather than financial materiality, (2) dedicated ESG funds tilt their holdings towards ESG leaders, but many institutional investors who have committed to ESG integration do not, (3) there is some evidence that an ESG premium exists, but it remains uncertain whether it is economically meaningful, and (4) managers readily address low-hanging fruit but hesitate to undertake larger investments to appeal to ESG investors. […] Nevertheless, the strength of ESG integration lies in its scale, so even uncertain and small impacts may add up to a meaningful effect.”

Read the study (PDF)

² Empirical study from the Swiss Finance Institute and researchers from ETH Zurich (2022) on the level of knowledge in Swiss households about sustainable finance and the factors influencing sustainable investing. Original title: Sustainable Finance Literacy and the Determinants of Sustainable Investing

(View PDF via Social Science Research Network).