Tycho Sneyers, Responsible for Sustainable Investments at LGT Capital Partners, sees a clear trend among institutional investors toward environmentally and socially-oriented investing.
Mr Sneyers, many private investors still have reservations about sustainable investments. Does the same apply to professional investors?
No, sustainability is a huge topic in this segment. The UN Principles for Responsible Investments (UN PRI) have existed for around ten years now. Since then, the investment volume managed according to these principles has increased tenfold, from about 6 billion to some 62 billion US dollars.
This volume corresponds to a little over one-third of the total global value of equity and bond markets. Currently, around 1500 asset managers, including LGT, have signed the UN PRI principles. Ten years ago, there were only 100 signatories. Sustainability, at least for institutional investors, is clearly becoming mainstream.
So what about your own clients and suppliers?
We didn’t only sign the UN PRI, we also support other sustainability initiatives. In addition to this, none of the client portfolios that we manage is invested in companies that manufacture, stockpile or supply controversial weapons such as atomic bombs, land mines, cluster munitions, or biological or chemical weapons.
«I am convinced that LGT is an important driver in this change of practices»
But a large segment of our clients even take this a step further. Today, about 80 percent of institutional clients who come to us for investment recommendations also want us to address the issue of sustainability. ESG criteria also play an important role when it comes to selecting our external investment managers.
We have been publishing the LGT ESG Report for four years now. The report is based on a systematic survey of our external managers for alternative investments and looks at the issue of sustainability. In 2013, around 28 percent took ESG criteria into consideration. In last year’s report, the number was 61 percent.
I am convinced that LGT is an important driver in this change of practices. As part of the financial industry, we can therefore contribute to a steady growth in the share of investment capital flowing into sustainable companies and projects.
Do you know how institutional investors gauge the prospects for returns on sustainable investments?
A recent study by the consulting firm Mercer and LGT indicates that 57 percent of respondents – so we're talking mostly about people with a very high level of investment responsibility and senior portfolio managers e.g. of pension funds – believe that consideration for ESG criteria leads to higher risk-adjusted investment performance. 34 percent feel that ESG has no impact on returns. And only nine percent believe it has a negative impact.
«Financial returns can be positively influenced by taking ESG criteria into consideration»
On the other hand, of the 57 percent, the majority believes that the positive impact is more a result of risk mitigation than improved performance. Scientific studies corroborate that the performance of sustainable investments in comparison to traditional investments is at least equal. The performance of our in-house sustainable investment funds also shows this.
With its ESG Cockpit, LGT has developed its own system for evaluating the sustainability of companies and countries. What was the underlying idea here?
We are convinced that financial returns can be positively influenced by taking ESG criteria into consideration during the investment process. In order to build sustainable portfolios, we therefore wanted to have access to precisely those criteria that were most important in the view of our individual clients or in our own view.
Our ESG Cockpit gives us a high level of flexibility in this regard, and allows us to individually address the different needs or objectives of our clients.
«The entire economy is definitely moving in the direction of sustainability»
For example, we can build a portfolio with a very low CO2 footprint, or a portfolio that excludes certain lines of business, such as alcohol production or gambling. For our own sustainable investment funds, we formulated exclusion criteria in collaboration with the Princely Family, and look for the most attractive investments in terms of sustainability and returns from the remaining equities and bonds.
Can sustainable investors actually influence the behavior of companies and countries, and therefore contribute to a more sustainable world?
Yes, definitely. The entire economy is moving in the direction of sustainability. It’s not only regulators and consumers – investors also play an important role in this process. Sooner or later, they will quite simply no longer finance activities that are harmful from a social or environmental perspective.
This raises fundamental questions about the livelihood of such companies.
A good example of this are coal mines. Another example of the impact that investors can have are CO2 emissions. Analysts and major investors are increasingly demanding transparency from companies regarding their environmental and social footprint, and CO2 emissions are part of that.
«Adherence to ESG criteria will in the future contribute to higher returns»
And once a company has disclosed this information, it comes under pressure to report lower emissions every year. But there are also positive incentives: for example, for an increasing number of companies, conducting business sustainably and adhering to ESG criteria is becoming an important driver of value, as well as a source for generating a positive image, growth and returns.
From that perspective, adherence to ESG criteria will in the future not only contribute to minimizing risk, but increasingly also to higher returns in investment portfolios.
