Exploring the depths of sustainable investing

Many institutional funds boast responsible investing credentials, but Switzerland’s Nest Sammelstiftung has taken the extra step of molding its investment strategy around a sustainable template.

The sustainable agenda is more than just a focus for Nest. It forms the very ethos of a fund that markets itself to potential members as “the ecological and ethical pension fund”.

Following a sustainable line to any level can be an exhaustive task, but Peter Signer, head of investments at Nest Sammelstiftung, admits that when investment strategy decisions run into debates in the sustainable sphere, an extra dimension of soul searching results.

For instance, should a sustainable investor adopt a hedge fund strategy?

Signer says that “there has been plenty of discussion as to whether we feel hedge funds are acceptable on sustainable grounds”.

It is not always a matter of simply accepting or rejecting an asset class though, and Nest’s pioneering approach has seen novel ideas being floated where the responsible investing and strategic asset interests meet.

Although it has not been able to realise it yet, Signer says there has been serious discussion of Nest Sammelstiftung launching a long-short strategy that would see it short sell the equities of companies it deems unsustainable.

If this strategy takes off it might be bad news for Swiss banking giants UBS and Credit Suisse.

The CHF 1.4 billion ($1.5 billion) Nest fund has blacklisted UBS “ever since we began our sustainable approach I think” says Signer – with perceived corporate governance shortcomings and the banking giant’s financing strategy coming under question.

While Credit Suisse “is close to rejoining our investment universe”, Nest Sammelstiftung’s ban on UBS remains on place.

Other banks are also on the blacklist with Nest tracking funding policies and in particular the financing of weaponry firms – an activity it feels violates its sustainable beliefs.

Signer makes it clear that these exclusions result from a careful sustainable policy rather than an anti-finance bias. After all, Nest invests close to CHF 5 million ($5.40 million) in London-based HSBC, while Russia’s Sberbank and China’s ICBC are both among its top-ten emerging market equity stakes.

Avoiding investing in ETFs is named by Signer as another consequence of Nest formulating its asset strategy under a sustainable gaze.

The fund shuns the index products just as it steers clear of all benchmarks – it would rather pick its own sector biases rather than have them carried into the strategy by the market.

In particular “we want to avoid investing in commodities as they are not at the top for us on sustainable reasons,” says Signer.

Ethical taste unsatisfied

Nest Sammelstiftung has taken its sustainable focus so far that its asset strategy is simply unable to keep pace in some regards.

Signer explains that its 25.7 per cent real estate holdings and 2.9 per cent private equity exposure would both be bigger positions if it was easier to invest towards its ideals in these asset classes.

The problem with real estate is that Nest is actively looking to invest in buildings with maximum energy efficiency – and there are apparently not enough ways to do that yet in its native Switzerland.

“There is not a big enough market for energy efficient buildings here so we have taken an indirect approach via funds” explains Signer. That has led it into a further stumbling block of accessing suitable funds, and ultimately “as not all real estate funds have green criteria we haven’t been able to fully implement our approach”, Signer reflects.

In the private equity space, the Nest fund has switched from investing via fund-of-funds to look for sustainable private equity funds under a managed account.

Signer is pleased that Nest has been able to use its private equity exposure to spur the development of renewable energies. It is an industry that a sustainable fund can clearly reap benefits from throughout the long investment horizons of its members.

“There have been a few problems in the European renewable energy industry and while growth isn’t linear we think there is good long-term potential”, says a convinced Signer.

Exclusion by business activity plays a part in Nest’s sustainable approach, with nuclear and weapon firms lodged on its blacklist. The fund aims for dialogue with companies that are close to falling out of its universe or alternatively are in a position to join.

While converts to the sustainable investment movement are these days free to pick and choose from a number of sustainable consultants, Nest has forged its own way to assess the myriad of companies it could invest in.

The fund co-founded the Inrate sustainable investing rating agency in 1995, a dozen years after its own foundation. Signer says that using Inrate has allowed Nest to tap into worldwide networks and bring engagement to its international equity picks. He says that sustainable scrutiny has seen Nest focusing its investment universe on merely a third of companies in the MSCI World index – a strategy which he confesses makes stock picking a difficult task.

Hard realities

No matter how sustainable its investing approach is, Nest clearly operates in the same environment as the rest of the world’s pension funds. It has made a substantial change in strategy in the past couple of years due to a background of persistent low bond yields.

Its fixed income exposure has been reduced since the start of 2011 to March 2013 from 39 per cent to 29 per cent – a figure at the very bottom of its tactical allocation range. Over the same period, equities have leapt from under 23 per cent to over 30 per cent with Signer saying “we don’t have many alternatives to equities” to mitigate fears of rising interest rates.

Nest was able to safeguard against Euro crisis fears though by reducing its government debt exposure to cover only Switzerland, Germany, the Netherlands and the UK. A new position on insurance-linked strategies is set to enter the portfolio in the second half of the year as Nest seeks further diversification, Signer adds. Other alternative approaches, like the possible long-short strategy might follow in time.

Nest Sammelstiftung’s 2012 returns of 6.31 per cent look good but perhaps unspectacular. Has it found its mission to grow its assets compromised in any way by its strictly ethical approach?

“Sustainable investing doesn’t always help returns but in the long run it will”, says Signer. Looking across the Swiss pension landscape, “our returns are higher than average but with a greater standard deviation”, he argues. Just as importantly for the staff at Nest’s headquarters, the sustainable credentials are proving a real attraction to the small and medium enterprises Nest seeks to provide pension cover for.