Effective transition

Sustainable investors can make a difference - and not just by investing in sustainable technologies. Thanks to engagement and the exercise of voting rights, they can also achieve this with traditional companies.

Fabio Pellizzari Head of ESG Strategy in Asset Management at Zürcher Kantonalbank

The transition to a sustainable economy is a challenging balancing act. (Picture: iStockfoto.com)

Sustainable investments can have an impact. This has been demonstrated by the example of Holcim. The cement company is the largest listed CO2 emitter in Switzerland. However, at the beginning of May 2023, the company submitted its climate strategy for approval and presented significant improvements compared to the previous year: According to the new decarbonisation strategy, the net-zero target for greenhouse­gas emissions is to be achieved by 2050. At the same time, it has had the targets confirmed by the Science Based Targets Initiative (SBTi). As recently as 2022, the target values were significantly less ambitious, which is why over ten per cent of voters did not support the targets.

Zürcher Kantonalbank's Asset Management has also been in close contact with Holcim's management team for several years to encourage the cement giant to become more sustainable. The latest success is partly due to this kind of engagement - and is a good example of how investors can encourage companies to act more sustainably.

Leverage CO2-intensive companies

There are different approaches to sustainable investing. These are often equated with investments in business models that are as sustainable as possible and the exclusion of controversial issues. What is often forgotten is that more can usually be achieved by transforming an existing business model into a sustainable business model than by simply supporting sustainable companies. This is because, on the one hand, some products are essential in order to realise the transformation of the economy at all. Secondly, the global impact is also much greater when companies like Holcim significantly reduce their CO2 emissions. Against this backdrop, it makes sense for sustainable investment vehicles to invest in stocks such as ABB, Nestlé and Holcim.

In practice, the transition of companies is very complex, expensive and time-consuming. The example of Holcim shows the challenge: on the one hand, there is the basic need for a roof over one's head. But many houses are made of CO2-intensive building materials. So if significant progress is to be made in terms of sustainability, the cement manufacturer needs to develop new products and invest in new technologies.

Responsible and Sustainable funds in brief

Our active funds in the "Responsible" product line are based on the reduction path of the Paris Agreement as standard. The CO2e-reduction target in the actively managed Responsible funds with traditional investments is at least four percent per year. Investments are made in companies and countries that do not violate any exclusion criteria and whose ESG performance we have analysed. In the Responsible funds, we take into account companies whose goal is to make the transition from a conventional to a sustainable business model.

The same criteria apply to the Sustainable funds as to the Responsible funds. In addition, we only take into account companies whose products or services have a positive impact on at least one UN Sustainable Development Goal (SDG leaders) or companies that score above average in terms of the ESG assessment (ESG leaders). The "Sustainable" product line (with the exception of the thematic funds) is geared towards the ambitious limitation of global warming to 1.5 degrees by the year 2100 and has set itself the goal of reducing CO2e emissions by at least seven percent per year.

Engagement and voting for transition

Simultaneous investment stewardship activities that include dialogue with companies (engagement) and the exercise of voting rights (voting) are a decisive factor in driving a company's sustainable transition. This approach is often more effective than completely withdrawing from the securities and losing the dialogue with the companies - unless a company is completely opposed to sustainability efforts, in which case it is completely removed from the sustainable portfolio.

Investment stewardship is a key component of a transition strategy and is an integral part of Zürcher Kantonalbank's sustainability strategy in asset management. This is applied to both active and passive investment funds. As the third-largest asset manager in Switzerland, Zürcher Kantonalbank's Asset Management is already in close contact with the top management of many Swiss companies. As a result, their concerns regarding sustainability are constantly discussed by the managers and are generally implemented outside of the public eye. Where no agreement can be reached, a showdown takes place at the Annual General Meeting. By the beginning of November 2023, around 15 per cent of the items on the agenda of the investment funds under management were voted against the management's recommendations.

This approach benefits investors in several ways: investment stewardship helps to reduce potential financial risks. At the same time, it increases the opportunity for companies to develop sustainable business models, which increases the chances of returns in the medium to long term. Ultimately, everyone benefits from the success of the transition - society, companies and investors.