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RI Interview: Metzler’s new CIO on German bank’s plans to integrate ESG

Venerable private bank looks to incorporate ESG with entire client portfolio.

Age and continuity have helped make Bankhaus Metzler one of the most respected names in German asset management. Founded in 1674 by Benjamin Metzler, the private bank has never left the hands of his descendants.

Now, having signed up to the Principles for Responsible Investment (PRI), it is currently integrating ESG (environmental, social and governance) factors with respect to its entire client portfolio.

Frankfurt-based Metzler manages around €30bn for wealthy private clients as well as institutional ones, including churches, corporate investors and pension schemes. Due in part to its track record as a money manager for churches, the bank offers ethical investment funds. These have attracted €1bn in assets and not just from churches but private clients and other institutional investors.

Offering sustainable funds is proof enough of a commitment to the PRI. But Metzler is going even farther, directing all equity and bond managers to consider ESG factors before investing. The current transition to full ESG integration is to be completed by July.

“I would describe what we’re doing as an evolution. In the past, we invested according to specific ESG criteria given to us by clients like churches. Now consideration of ESG data will be an integral part of our investment process,” said Metzler Chief Investment Officer Rainer Matthes in a recent interview with Responsible Investor. Matthes succeeded Frank-Peter Martin, who joined Metzler peer Frankfurt Trust, in 2015.

Matthes says ESG integration is akin to modernising and improving the private bank’s investment process. “For us, it’s like a re-launch, or Metzler Investment Process 2.0. We believe that if ESG factors are considered, you are in a better position to manage risks and generate alpha [market outperformance],” he said.

The ESG scores of companies are not, however, the decisive factor as to whether Metzler will invest. “History shows that companies that score well on ESG tend to outperform, but of course there are other crucial factors like fundamentals and the outlook,” Matthes added.In integrating ESG, Metzler’s equity and bond managers rely on corporate research provided by Oekom, a Munich-based provider and, since last summer, MSCI. Though MSCI is known for having a wide global reach – 6,000 companies worldwide – Matthes notes that for Metzler’s purposes, the coverage from both ESG research firms is comparable. “As we specialise in European stocks and bonds, we are very happy with what we see from MSCI and Oekom,” he says. With respect to Metzler’s ESG priorities, companies are scored on the basis of their diversity, their environmental record, supply chain management, energy efficiency and corporate governance.

After switching to full ESG integration, Metzler plans to measure the amount of outperformance its hopes to get from its stock and bond investments. The integration does not cover the entire €30bn in AuM, as the bank also employs derivatives to manage a portion of the portfolio.

For Metzler’s sustainable funds, specific ethical exclusions apply. For example, in selecting the 60 investees for its recently launched “Dividend Sustainability Fund,” the bank used MSCI data to weed out companies involved in such sectors as controversial weapons (e.g. cluster bombs), nuclear power, tobacco, gambling and pornography.
Being a responsible investor also entails engagement with and voting at investee companies. For those based in Germany, Metzler has its own team of ESG specialists. For international companies, the private bank has, since October 2014, used UK asset manager F&C Investments (now known as BMO Global Asset Management). The F&C mandate covers a portfolio of equities and corporate bonds worth €12bn.

Asked how the mandate was going, Matthes said he was pleased with F&C’s reporting and results. “We hear from them on a bi-annually basis and we also see progress at companies on ESG issues important to use after F&C engages.” As a PRI signatory, Metzler was involved with other institutional investors in three thematic engagements in 2015 (palm oil, human rights in the extractives industry and legal minimum wage).