Article
Credit Suisse Asset Management is undertaking a systematic and comprehensive realignment of its investment strategies and product portfolio, in addition to integrating ESG criteria into its investment process.
April 29, 2020
The realignment is scheduled for completion by the end of 2020. The incorporation of environmental, social, and governance (ESG) criteria will be consistent with the highest practicable degree, with a transition from traditional to sustainable benchmarks. Experience shows that, on average, companies with strong ESG performance outperform their peers in the long term.
Today, asset managers no longer have to think about whether to integrate sustainability criteria into their investment process; the question now is how far-reaching and systematic they are in applying the criteria. There is still a long road ahead: while many providers nowadays have implemented a set of exclusion criteria as a starting point and apply them to selected products, only a systematic approach to integrating sustainability-related risks and opportunities into the investment process is often missing. Credit Suisse Asset Management has therefore opted to define sustainability criteria for the equity, bond, and real estate asset classes, which will be systematically integrated into virtually all of its actively managed investment funds by end-2020. It will also realign the relevant benchmarks in parallel. Traditional benchmarks are to be replaced by sustainable benchmarks wherever practicable and wherever sustainable benchmarks are available. The number of possible equity indices to choose from is already extensive, whereas sustainable bond indices are still relatively few and far between. A specific real estate benchmark will be used for real estate investments.
Credit Suisse Asset Management will apply its holistic approach to various elements and stages of the investment process. For example, ESG criteria will be used to define the investment universe, will be integrated into the security selection process, and will be used as a basis to further strengthen our role as active owners. This will be accomplished through the fiduciary exercise of voting rights at general meetings (proxy voting) and the introduction of systematic, outcome-oriented dialog with company representatives on critical sustainability themes. Last but not least, Credit Suisse Asset Management already today provides detailed ESG reporting to enhance portfolio transparency for its clients. Orienting investment strategies towards sustainability has a long-standing history at Credit Suisse: within real estate we have been considering ESG criteria for a number of products and investment strategies in recent years. Accordingly, we are aspiring to apply that expertise in combination with best market practice for equities, fixed-income, and balanced strategies as well.
"We are revising our existing product range across all asset classes,"
- explains Dominik Scheck, Head of ESG, Credit Suisse Asset Management, Switzerland and EMEA.
First, existing benchmarks are to be replaced by sustainable equivalents. While this is a relatively straightforward task for equity investments, establishing suitable benchmarks for bonds and real estate is still pretty much in its infancy. In a second step, portfolios are to be realigned to focus more on sustainability.
"Traditional benchmarks are to be replaced by sustainable benchmarks wherever practicable."
Asset values in ESG funds and ESG exchange-traded funds (ETFs) in Europe have risen from an estimated EUR 256 billion in 2013 to EUR 446 bn at end-2017. In Switzerland, we have seen a substantial increase in both funds and mandates over the last nine years, with an exceptional uptick in 2018 (+72% versus 2017). According to Bloomberg Intelligence, the US and Canada are experiencing similar growth rates. The significant flows into ESG investing is not just limited to equities; it is occurring across all asset classes including debt.
"Companies that we strongly feel do not have a sustainable business model will be removed from, or underweighted in our portfolios in the medium term, to the benefit of more sustainable firms. This will be done in the same way as avoiding companies that are deemed too expensive using traditional fundamental analysis techniques,"
- explains Scheck.
Going forward, Credit Suisse Asset Management will assign greater weight to ESG criteria that generate a positive impact on investment returns. These can include a company’s ability to respond effectively to environmental issues such as climate change or a company’s innovative strength. The ESG criteria with the greatest impact will be identified using quantitative and econometric analyses (sector-level materiality), as well as through the foresight of our sustainability and investment specialists.
As part of the initiative, Credit Suisse Asset Management is in the process of systematically migrating its suite of fund products. Thematic equity funds have already been adjusted, followed by a number of fixed-income products that predominantly serve institutional clients. Some pension products and their building blocks were adjusted in October 2019. The remaining fund products are currently under review, with the objective of integrating ESG into the investment process to the largest degree possible, considering the specific product characteristics.
For its suite of sustainable real estate products, Credit Suisse Asset Management has defined sector-specific sustainability criteria. The Global Real Estate Sustainability Benchmark (GRESB), which analyzes and assesses ESG performance in annual evaluations, serves as the ESG benchmark for direct and indirect real estate investments. For Credit Suisse Asset Management, 14 products from the Core/ Core Plus Segment are part of and rated by GRESB.
Credit Suisse Asset Management’s real estate unit can already look back on many years’ experience implementing ESG criteria, with building certifications, energetic building optimization and ESG performance measurement using GRESB among the core initiatives of the sustainability strategy.
In addition to market-standard sustainability labels for real estate such as LEED, BREEAM, DGNB, Minergie, etc., Global Real Estate has developed greenproperty, its own holistic ESG standard that has already been applied for over ten years. In the field of building optimization, Credit Suisse is committed to a long-term partnership with Siemens, which is put to use for short- and long-term operational optimization, as well as for long-term and capital-intensive renovations. This has made it possible to significantly increase energy efficiency and reduce harmful CO2 emissions by more than 10%. Every year, the GRESB results demonstrate how successful the individual sustainability measures are relative to the real estate market and specific peer groups. The higher the GRESB score (out of a possible 100 points) or the more GRESB stars (max. 5 stars) received, the better the ESG or sustainability performance, in addition to conventional economic performance data.
Based on the successful application of ESG in real estate investments, the goal is to profit from this experience and integrate ESG criteria into virtually all actively managed equity, bond, and multi-asset class investment funds by end-2020.
Whereas ten years ago many investors felt that integrating ESG criteria generally reduced returns, today the majority of investors view the inclusion of ESG criteria either as a way to increase a portfolio’s returns or as a better means of controlling risks. Numerous studies have confirmed the positive correlation between a company’s sustainability and its financial performance. The most comprehensive meta-study to date was conducted by the University of Hamburg in 2015: it combined findings from over 2,200 individual studies1, more than 90% of which revealed no negative correlation between the inclusion of ESG factors and a company’s performance. Over 50% reported a positive effect. This positive correlation pertains to all asset classes (equities, bonds and real estate) and is found among both developed and emerging markets (even more pronounced for the latter). Recent studies also corroborate these findings.
The positive correlation is also backed by market data such as the performance comparison between the broad MSCI Emerging Markets Index and the MSCI Emerging Markets ESG Leaders Index. Investors who opted for the ESG equity index have achieved a total outperformance of 14.65% from its launch in October 2014 to end-20182, with an annual excess return of 3.19%. Most striking is the fact that excess returns have been positive each year except for 2018. We see this as a sign that additional information in the form of a sustainability analysis can generate decisive added value in emerging markets in particular.
Higher demands are being placed on companies by a new generation of financial decision makers on the lookout for more sustainable investment solutions.
The most important ESG figures are published in a monthly fact sheet to keep investors up to date on how their portfolio aligns with ESG criteria. This provides an ESG rating not only for the top ten positions but also for the overall portfolio and rates the portfolio’s performance relative to individual ESG themes.
1 Bassen, Alexander, Busch, Timo, and Friede, Gunnar (2015): ESG and financial performance: aggregated evidence from more than 2,000 empirical studies, Journal of Sustainable Finance & Investment, Vol. 5, Issue 4, pages 210–233.
2 MSCI data for the period from October 31, 2014, to December 31, 2018.