RI Research: Can you tell us a bit more about your approach to ESG at NEST?
Ulla Enne: Nest are a fund covering many small and medium sized corporates with 2.7bn CHF under management. Since its inception 35 years ago, NEST defined its sustainability profile; it’s in the NEST “DNA”. Sustainability in its broad sense is seen as part of fiduciary duty and is explicitly mentioned in the investment guidelines. Being a pioneer on the topic of ESG, not ‘doing’ ESG is therefore a huge reputational risk for us. It is therefore somehow a different pressure we experience in this matter as for example public funds in Switzerland. In practice, we employ a norms-based investment strategy and also have strictly implemented values-based exclusions. Also, we apply a positive screening called best in service approach that is based on the externalities concept that assess the impact of not only firms but also their products and services over the whole life-cycle. We actually use a list with our asset managers which states what they can and cannot invest in. Therefore, we separate sustainability as we understand it from asset management. We also measure the non-financial impact of our investments at the bond and stock level using Inrate and implications of sustainability on portfolio levels. Currently, we are examining how to efficiently combine the ESG impact ratings as a basis for engagement including measurement. In e.g. non-listed equity and infrastructure we work with allowed and not allowed sub-sector lists with selected managers and discuss implementing our ESG criteria (e.g. exclusions) to side-letters.
RI Research: How has your approach impacted the fund?
Ulla Enne: Our financial performance has been positive over the last 10 years and we are beating our benchmark (Credit Suisse Swiss Pension Fund Index), after costs. During the market downturns our ESG stocks did not fall as much as the market, however during times of peak market performance these stocks’ peak were not as high, showing a lower volatility overall it could be concluded. Although speaking about performance, proper implementation of the investment strategy is key and also has the biggest effects on performance.RI Research: Did you encounter any hurdles on your ‘ESG journey’ and if so, what were they?
Ulla Enne: There are many different ways to integrate ESG. It was fairly tricky but also very interesting for us to learn how to integrate ESG effectively and at a relatively low cost into our active investments. Since NEST started the market looked totally different as today, innovative solutions showing project character were set up.
RI Research: What are your targets going forward?
Ulla Enne: Our plan is to start mapping our investments and our approach in general using the UN SDGs as a framework. The first drafts exist, but across our portfolio, not all asset classes are yet sustainable in the way we would like to have them, since approaches vary among asset classes (e.g. private debt, and real-estate funds). Therefore, we aim to have a consistently high level of sustainability across all asset classes in a couple of years, alongside increasing our engagement activities
RI Research: For any funds starting to think about ESG, can you give any advice?
Ulla Enne: I think the first step has to be to define how you understand sustainability and to be clear about what your motivation for doing it is. You can approach it as a kind of triangle of questions: What is ESG for us? What is our motivation? Which asset class does this affect and what ESG approach (tools/ products) best serves reaching the defined sustainability goals in each asset class? I think it can be slightly easier for public funds to get on the agenda. However, I would advise caution on any statement that says ‘ESG’ creates better financial performance. We’d like to see more research on the interactions of sustainability effects on the risk/return profile within portfolio construction, since ESG approaches vary widely and not all might work in the same way with given portfolio construction approaches.
Click the link to take a look at the top-line data or buy the full RI Research report, titled: ESG: Do You or Don’t You
Questions the RI Research ‘ESG Do You, Don’t You’ Asset Owner report answers:
- How does the integration of ESG impact financial performance in practice?
- At which steps do investors integrate ESG into their investment process?
- First-hand experiences of the ‘ESG-journey’ from asset owners
- What are the drivers of and barriers to ESG integration?
- How is ESG approached in DC pensions?
- Is ESG influencing asset manager selection?
- What is the role of consultants?
- Do asset owners measure the non-financial impact of their investments?
- What are the implications of ESG developments for future asset owner strategy?