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Nest Sammelstiftung, the SFr 3.3bn (€3bn) pension fund for SMEs, is one of the first pioneers of responsible investment in Switzerland – excluding both fossil fuels and US Treasuries on ethical grounds for more than 20 years.
It is one of the so-called “collective foundations” formed after Switzerland brought in mandatory pensions for employees. There are a few hundred such institutions in the country and Nest distinguished itself from the start as an “ecological and ethical pension fund,” says Ulla Enne, Head of Investment Operations and Responsible Investing.
“It’s in Nest’s DNA and implemented on all levels,” says Enne. More than 80% of its beneficiaries are supportive of the approach according to regular surveys.
Nest, which last year returned 4.08%, has a two-pronged approach to ESG, she explains.
It has an exclusion criteria, which includes fossil fuels, weapons, GMO, nuclear, alcohol and tobacco, gambling and pornography.
And it has a selection criteria, based on sustainability. Enne says Nest “doesn’t buy sustainable products on the market”.
“We have our bespoke sustainability approach and criteria that creates the investable universe and our managers have to work with this.” It also has elements aligned with impact investing, though Nest doesn’t classify it as such, says Enne.
“It takes it a step further in the sense that sectors are divided into basic needs of society,” she explains. “We look at the impacts a company’s products and services have on the environment and society. It’s not simply ESG.”
In each sector, such as housing, transport or energy, companies are compared to each other on their utility to society. “It becomes clear that fossil fuels, coal, oil and so on, they have no chance compared to renewables so they are excluded.”
She admits that the approach does heavily restrict Nest’s investment universe. “If you take MSCI World, the standard market index, only 40 per cent is investable.”
When asked how Nest juggles meeting its legal obligation to deliver market rate returns when nearly half of its equities portfolio is outside conventional indices, Enne says “our experience over the last 20 years shows that it is possible.”
“Since it’s not passive investing it's the job of the asset managers to construct a portfolio that is optimised to market benchmarks,” she adds. In recent years, the bulk of Nest’s equity portfolio was managed by Pictet, while Amundi, State Street and Dimensional managed some. Credit Suisse, Vontobel and Unigestion also had mandates with Nest.
She says data over the past ten years shows Nest’s performance is in line with Swiss peers. “We don’t say it is thanks to sustainability or in spite of it. We don’t see a statistical relevance. In the long run it basically evens out.”
‘A lot of the commitments are so far into the future. You get attention and good press. But what does it mean at the end of the day? Nothing, without a plan and targets.’
The approach means Nest has to have a strong belief in long-termism. “Of course we have higher tracking errors from the market index. That’s clear,” she says. “In the short term if markets go up [driven by oil], and other sectors we have exposure to are not going up – but that’s just a market phase.”
Nest applies the same approach to its fixed income portfolio of corporate and sovereign bonds. “It’s very strict for developed markets,” she explains.
Only around 10 countries are investable including Switzerland, Belgium, Austria, Netherlands, Sweden and Denmark. Even US Treasuries, a staple in many sovereign bond portfolios, are excluded for a range of human rights reasons including civil rights issues and that some US states use capital punishment.
Enne says this has proven a challenge for its portfolio managers but says supranational bonds are often eligible and have similar ratings to sovereigns.
For private equity and infrastructure, in the absence of public information and ratings, Nest defines investible sub-sectors while excluding some subs-sectors. As a result, its entire infrastructure portfolio consists of renewable energy and energy efficiency projects.
The next step for Nest is looking at Net Zero.
“If we look at the requested commitments to Net Zero, Nest is on a good [path], largely compatible, no fossil fuels, reduced CO2 emissions also in scope 3 compared to the market index,” Enne says.
But she has concerns about how to fix goals. “Now, everyone is talking about Net Zero. We get invitations all the time from asset managers on webinars, information, products.
“Some asset owners in Switzerland have made commitments.”
But for Enne there is a risk of greenwashing. “A lot of the commitments are so far into the future. You get attention and good press. But what does it mean at the end of the day? Nothing, without a plan and targets.
“It would feel more credible if they set measurable targets, on a shorter term, let’s say year by year.”
Register for RI Switzerland to hear Ulla Enne speak at tomorrow’s panel session: How is engagement and voting driving value for Swiss investors and shaping the Swiss economy.