Nest – Swiss RI pension performance in action

The debate about whether responsible investment can add value to pension fund investments meets its proof at the SFr650m (€390m) Zürich-based Nest scheme. The fund, an umbrella plan, started in 1983 when a group of small and medium-sized independent Swiss companies, mostly in the social work and life sciences sectors, united to invest contributions in a series of defined contribution funds. Significantly, since inception these funds have been run under strict SRI criteria. Felix Pfeifer, chief executive officer at Nest, says this translated at the time into negatives: no money for the arms industry or for companies operating in apartheid South Africa. Some negatives have stuck; the funds have never invested in nuclear power, for example. The SRI policy, he says, reflects the social orientation of the constituent companies and their wish to seek returns with a responsible ethic. Time and a changing political arena, Pfeifer says, have shifted investment priorities towards environmental protection and employee friendly companies. One constant, however, has been good performance. Pfeifer calculates that total assets have grown by almost 20% per annum, including healthy returns in recent years. In 2003, the fund’s aggregate returns were 10.7%, dipping slightly to 5% in 2004. By2005 it was back up to 9.9% before dipping slightly to 6.9% in 2006. The number of members rose by 10% to approximately 8000 in the first half of 2007 alone and the fund now runs assets for about 1600 companies, which have broadened to include service sector and high tech companies. A similar fund, the Abendrot Foundation, runs SFr500m on an SRI basis for companies around the city of Basel.
Nest’s organisation is highly decentralized. An assembly of employers and employees decides on key issues such as board composition and investment principles. The employer, which makes a guaranteed pension contribution for employees under Swiss law chooses the DC fund they will invest their employees’ pensions in. Pfeifer says this implies a special responsibility on the side of the employer to ensure returns are sound. Unlike funds that allocate or screen a portion of their assets to the RI space, Nest benchmarks the funds it offers against its RI policy using the INrate system, a method it developed with Swiss SRI research group Infras. Pfeifer explains: “We developed our own sustainability ratings approach and ESG strategy in order to make it systematic. One significant aspect of this rating is that it judges the broad service to society that a company
makes, not just issues within its sector. For example, we do not compare automobile companies, but companies within the whole transport sector. Another significant factor is that the SRI rating of a company is entirely separate from the financial rating. There is no financial influence on our responsible judgement.” The fund also started a commercial venture with Raiffeisen Bank in Switzerland and co-launched four SRI mutual funds based on its own methodology and sold by the bank as the Raiffeisen Futura Funds. Pfeifer says: “We also have assets invested in these funds. One of them, a Swiss equities fund has been one of the best performing in Switzerland, and not just amongst SRI funds. As a pension fund we are normally above the relevant benchmarks such as the Pictet BVG93 for Swiss pension funds. The fund also has separate segregated mandates with asset managers, which have to work within its ratings criteria. Current managers include Swiss houses, Pictet and Vontobel. Real estate is another area where the fund has a significant allocation, both direct and indirect holdings. The indirect holdings are managed through a range of funds over which Nest has no control and which Pfeifer points out are not SRI. Nevertheless, in its direct real estate holdings – i.e. the buildings it physically owns – Nest can and does apply energy efficiency standards in the pursuit of better returns. Significantly, for this reason, it proposes to buck the institutional market trend by decreasing its property fund exposure and buying more buildings.“Our energy efficiency programme is carried out in partnership with the Alternative Bank of Switzerland and we are testing a new strategy which takes into account real estate standards put together by the Swiss Centre for Responsible Investment. We only have real estate exposure in Switzerland, which does make it more manageable for energy efficiency.” Pfeifer says the real estate discussion is part of a broader strategy rethink that could lead to manager hires in 2008: “We are quite risk averse and have 57% of assets in fixed interest, both credits and government bonds, 23% in equities and 20% in real estate. Our question is how we can take a bit more risk. We are interested in private equity and have a small allocation with Partners Group in Switzerland, which does have elements of Cleantech investment. Partners Group reports to us on what they buy and we look through that for potential issues with our SRI policy, although it should be said that we are not as strict about how we invest in private equity as in other asset classes.” Pfeifer says Nest is following closely the debate on cleantech and renewable funds, particularly based around the water conservation theme, and that they have looked at some interesting hedge funds operating in the SRI arena: “We think we will end up hiring other managers in 2008. We have seen studies that say that performance is not worse from SRI, but we have had good performance! There is of course a danger that as more investors start investing in this area returns could come down.”