Bankhaus Metzler is one of the oldest and most trusted names in German asset management. Founded in 1674 by Benjamin Metzler, the Frankfurt-based private bank has never left the hands of the family and survived more than a few modern financial crises. The bank’s current chief executive, Friedrich von Metzler, also is a recipient of the coveted “Bundesverdienstkreuz” (Federal Cross of Achievement), which he earned for his promotion of Frankfurt as a major financial centre.
Small wonder then that for generations, Germany’s wealthiest have had Metzler manage their money. That trust extends to institutional clients like pension funds and church investors whose money accounts for a good chunk of the bank’s €30bn in assets under management (AuM). Given its background, it should come as no surprise that Metzler has recently dedicated itself to responsible investing, something it hasn’t talked about much – until now.
So what specifically is Metzler doing? For starters, the bank offers several socially responsible investment (SRI) funds and, with them, has taken in a respectable €575m from its longtime church clients and other institutions like foundations. A signatory to the Principles for Responsible Investment (PRI) since 2012, the bank also excludes banned munitions (i.e. cluster bombs and land mines), and companies that rely on child labour, from its entire €30bn portfolio, of which €5bn are equities. “I understand that the industry considers this to be the minimum criteria responsible investing, but the fact is that it should be a no-brainer for any asset manager,” said Frank-Peter Martin, Member of the Partners’ Committee at Bankhaus Metzler and Head of Asset Management. He spoke to RI at the bank’s headquarters in Frankfurt. Indeed, Metzler wants to go beyond such minimalism and adopt an overall sustainable investment approach. For non-SRI equity investments, this means a shift to a “best-in-class” approach for each sector Metzler invests in.Unlike exclusion-driven SRI, best-in-class overweights investees that do well on environmental, social and governance (ESG) criteria and underweights those that do not. One of the advantages of best-in-class is of course a much bigger investment universe than for SRI and, hence, greater flexibility to maximise return. This is particularly important for pension funds which are struggling to meet their liabilities in this age of low bond yields. According to Martin, the best-in-class approach is exactly what Metzler’s clients require when they ask for sustainable investing. “There is no question that an increasing number of schemes in Germany are interested in sustainable investing. But because of their obligation to pay pensions, they can’t afford to give up any return whatsoever,” Martin said.
To determine the “best-in-class” in a given sector, Metzler has, together with German ESG research firm Oekom, devised a filter that is based on 400 ESG criteria. Beyond basic exclusionary criteria like banned munitions and child labour, the filter includes such gauges as the number of women in management, environmental record, supply chain management, energy efficiency and corporate governance. Frank Heise, director of portfolio management at Metzler, said that not only does the approach mean no sacrifice of return – as measured against such benchmarks indices as Stoxx 500 or MSCI World – it also enables the bank to mitigate any reputational risk associated with investees. “We no longer want to bear the risk of being invested in a company that, suddenly, is faced with a child labour scandal in India or, as we saw in Bangladesh, doesn’t have its supply chain well managed,” Heise said.
However, Martin and Heise also acknowledged that from a return perspective, it is not necessarily the case that sustainable investing is superior to conventional investing. “We at Metzler have built sustainable funds that, in the last seven years, have beat their benchmarks.
On the other hand, our non-sustainable funds outperformed too, so it’s ultimately a question of the client’s philosophy and want the client demands,” said Martin, adding that what clear is that sustainability does not necessarily mean less return. That is a message that the bank has been strongly conveying to Germany’s institutional market.
In addition, a caveat to Metzler’s sustainable approach is that for some developing markets, for example China or Eastern Europe, the bank’s ESG criteria are less stringent than those for the mature markets of North America and Europe. “The reality is that I can’t apply the same criteria to companies in those markets as I can to [chemicals firm] BASF and [drugs firm] Bayer. That would be like comparing apples to oranges which is unfair,” says Martin. To encourage investees to either improve or maintain their performance on ESG issues, Metzler relies on engagement.All of it is done internally, and last year, the number of company visits by the bank’s ESG specialists totalled 180. Heise said that while Metzler is a relatively small asset manager, the companies take its input very seriously. “Of course the name Metzler opens doors, but a bigger reason is that they want to keep us as shareholders,” said Heise, adding that during the engagement visits, the bank speaks to an executive 99% of the time. Asked if the bank ever had to resort to divestment after failing to get its ESG message across, Martin and Heise replied no, for keeping Metzler as a long-term shareholder was paramount for them.
The final part of Metzler’s responsible investment story is voting. Although the bank has voted its German shares for some time, it is extending the activity to its international equities. It therefore plans to hire a proxy firm that fits the bill by the end of March.