Renditechancen mit nachhaltigen Vermögensanlagen

Return opportunities with sustainable investments

Finance Theme, November 2020

Return opportunities with sustainable investments

“Wind of Change”
We are currently living through an era of change, in which a clearly identifiable shift in social attitudes is evident. It involves a more conscientious lifestyle and a desire for greater transparency and disclosure. This transformation is also reflected in the investment behaviour of private individuals and institutional investors. Both investor groups are increasingly seeking out investments that will have a positive impact on the environment, society, and corporate governance, so-called “ESG” investments Environment, Social, Governance. For this reason, compliance with rigorous sustainability criteria is becoming an ever more important aspect for investors – in addition to the financial return.

The Millennials – a pioneering generation
A key driver of this development has been Generation Y, also known as the “Millennials”, which designates people born between 1981 and 1996, and now aged 24-39. Why is that?

Generation Y is renowned for being extremely education-oriented and well-informed, with a strong affinity for all matters digital. As so-called “digital natives”, they expect reliable digital access to financial services and the corresponding online offerings.

“We find ourselves in a world that is changing at a dramatic pace as a result of digitalization and its permeation of traditional areas.”

However, digital offerings alone are not sufficient in the financial sphere. Many Millennials want their individual life situations to be understood and taken into account. Accordingly – and despite their strong desire for independence – Generation Y relies heavily on the input of experts and other reference persons. They value and require direct dialogue with advisers, from whom they expect expertise and broad life experience, as well as a clear opinion. In addition, when it comes to banks and asset managers, Generation Y expects comprehensive disclosure of the opportunities and risks that come with a financial investment, as well as the corresponding economic and social repercussions.

Considering that Generation Y will account for three quarters of the global working population by 2025, with no less than 86% of them living in the emerging markets and with an asset base already valued at some USD 24 trillion it is clear that the financial industry must understand the needs of this generation and scrutinize its behaviour in investment matters. For example, it is important to understand the great interest in megatrends such as urbanization, automation, and new forms of mobility. In short, in addition to a handsome return, Generation Y would also like its investments to have an acceptable environmental footprint. This form of behaviour serves as a signpost to the future – to a world that is changing at a dramatic pace as a result of digitalization and its expansion into traditional areas.

Beware of “greenwashing”! Or making things look more ecological than they actually are ...

Many financial companies are guilty of various degrees of “greenwashing”, but what exactly does that mean?

Greenwashing essentially describes a company’s attempt to polish its image in a manner that fits with the times – but for reasons of opportunism rather than ethical principles. In many cases, the banks focus their efforts mainly on adherence to ESG criteria in connection with operational processes, rather than the end result or economic and social aspects. In many cases, this approach leads to a significant discrepancy between reality and investor expectations.

Indicators of greenwashing might include, for example:

  • sustainable products being offered that fail to demonstrate any positive impact or contain incomprehensible information,
  • sustainability deliberately being stressed on the public relations side, without this aspect being properly explored with investors,
  • offerings being largely made up of investment funds that apply only weak sustainability filters, if any.

Regulation – an opportunity for sustainable investments
A recent initiative of the European Union (EU) is seeking to introduce new provisions that will have a strong impact on sustainable investing. The aim here is to define criteria for a standardized classification system in the area of environmentally-compatible business activities.1

But how do institutional investors and asset managers incorporate sustainability factors into their risk processes in practice?

The EU is calling for full transparency in this area in the future, with the emphasis on readily comprehensible disclosure. In addition, investors should be given a clearer picture of the actual CO2 burden associated with their investments. These measures can be expected to bring both the EU and the Swiss financial centres much closer to a sustainable pathway in the near future.

Switzerland as leading location for sustainability
The Swiss Federal Council took a major step in this direction on 24 June 2020, when it endorsed a report containing guidelines for sustainability in the financial sector.2 Its underlying objective here is to turn Switzerland into a leading location for sustainable financial investments, thereby creating an environment in which financial returns are no longer out of alignment with positive social and environmental endeavours.

“There is a growing global awareness of environmental matters and changed consumer preferences, which coupled with regulatory measures – is leading to permanent adjustments to investment portfolios.”

The Federal Council believes the “Sustainable Finance” initiative is a major opportunity for the Swiss financial centre, as well as a distinguishing competitive factor on the road to sustainable growth. It would like the relevant parameters to be designed in such a way that the competitiveness of the Swiss financial centre is improved on an ongoing basis, thereby making an effective contribution to sustainability in keeping with the UN’s “Agenda 2030”.

The growth of sustainable investments – from seedling to flourishing plant
Switzerland

The graph showing the development of sustainable investments drawn up by the association Swiss Sustainable Finance (SSF) in collaboration with the Center for Sustainable Finance and Private Wealth (CSP) of the University of Zurich provides a clear indication of the exponential growth rate of sustainable investment strategies and the associated tailwind.

  • As things stand currently, some CHF 1,163 billion is invested in Switzerland in line with ESG criteria – which represents around a third of all invested funds. Moreover, this equates to a year-on-year rise of no less than 62 percent. The SSF believes the current climate protection debate has played a crucial role in this development.
  • Significant growth of 147 percent has been recorded by sustainable funds. As at the end of 2019, these had an investment volume of CHF 470.7 billion, which equates to 29 percent of the entire Swiss fund market.
  • Even more impressive growth compared to 2018 – or a stunning 195 percent – has been recorded in the area of sustainable mandates, with assets under management in this area currently standing at CHF 208.9 billion.
  • At the end of 2019, the sustainably managed assets of institutional investors amounted to CHF 483.7 billion, which is around 30 percent of all assets under management in this area.

development

Europe/DACH region
Analysis of the findings of the German Sustainable Investment Forum (“Forum Nachhaltige Geldanlagen” or FNG) and the corresponding report reveals that there has been a particularly pronounced rise in the volume of sustainable financial investment in the DACH region3. The positive trends playing out in German-speaking markets are also evident in the chart below, which shows the growth in market share of both sustainable funds and sustainable mandates.

Markt

Global
This trend is also apparent at a global level. There is a growing global awareness of environmental matters and changed consumer preferences, which – coupled with regulatory measures – is leading to permanent adjustments to investment portfolios.

In 2018, sustainable investment products had an overall value of USD 31 trillion, which represents a rise of 34 percent within two years.4 According to estimates drawn up by the Global Sustainable Investment Alliance, some USD 4 trillion can be expected to be channelled into sustainable investments annually in the future. If this growth forecast is correct, we will see up to USD 50 trillion invested globally over the next decade with a view to having a positive environmental, social, or governance impact.5

Europe and the US are the acknowledged global leaders in the area of sustainable investment strategies. According to the Global Sustainable Investment Alliance, USD 26.1 trillion was invested sustainably on these two continents alone at the end of 2018. Europe currently leads the way with USD 14.1 trillion, but the steep trajectory of growth recorded by the US in recent years suggests a clear trend has established itself Stateside too. However, the surge of interest in this area is not limited to these two continents – other countries tracked by the Global Sustainable Investment Alliance such as Japan, Canada, and Australia/ New Zealand have likewise recorded sharp increases in sustainable fund volumes in the recent past.6

Consumed by the spirit of the age
While megatrends such as urbanization, automation, and new forms of mobility are changing our world, with companies rolling out innovative concepts and developing sustainable strategies, a number of long-established firms are still stuck in the past and in danger of losing their competitiveness.

“Future-oriented solutions such as smart farming, robotics, electro-mobility, and IT security have recorded average earnings growth rates of between 20 and 35 percent annually.”

The paradigm shift has long been apparent, cycles of innovation are becoming shorter, and young enterprises are recognizing the multifaceted possibilities and potential offered by global megatrends. They are pressing ahead with great agility, leaving companies with obsolete business models in their wake. Indeed, a large number of companies that are still contained in today’s leading stock market indices are effectively viewed as “obsolete”. The majority of investor portfolios remain invested in these companies – and therefore in the past.

Particularly in an era of weak economic growth, investors should switch their focus to companies that are picking up on future-oriented developments and trends. These include a number of cleverly designed business models in the areas of digitalization, energy and the environment, as well as healthcare and ageing.

A look at the MSCI World Index speaks volumes in this respect. The average annual earnings growth rate across all sectors over the last three years has been a positive but extremely modest 0.7 percent. By contrast, future-oriented solutions such as smart farming7, robotics, electro- mobility and IT security have recorded earnings growth rates of between 20 and 35 percent annually over the same period.8 Investors will have to engage with these themes going forward as they are directly affected.

“Geely” – a perfect example of Industry 2.0

The Zhejiang Geely Holding Group Co. Ltd. (or “Geely” for short) is China’s third-largest automotive manufacturer. The Chinese parent company of Volvo can rightfully call itself a market leader in the development of autonomous vehicles, having recorded a 53 percent rise in earnings in 2018.

During that year, the company unveiled its innovative plan “Geely Intelligent Power”, which envisages the production of 13 new electric or hybrid vehicles by the end of this year. By that time, the company’s sales strategy will be almost exclusively focused on electric vehicles.

Mobility is a prerequisite for social participation, progress, and independence. While we do not want to lose this flexibility in the future, there are also new needs and expectations to be taken into consideration, which will in turn result in an evolution of mobility as a concept. Geely recognized this trend at an early stage, redesigning its strategy accordingly and setting itself the goal of becoming the market leader for new energy technologies, alternative fuels and fuel cells, and purely electric as well as hybrid technologies.

Lynk 01/2017

Whereas the automotive manufacturing process has barely changed over the last century, Geely’s flagship brand “Lynk” relies on fully-automatic systems for emergency braking and pedestrian recognition situations, as well as monitoring systems for head-on collision and blind spots. Lynk vehicles come with 360° parking assistance and lane-keeping assistance as standard. But the innovation doesn’t stop there: Geely has ambitions of making fully-automated driving possible by 2025.

The traditional automotive industry is also set to undergo a radical transformation. While it may be true that numerous combustion engines are still rolling off production lines, the fact remains that nine out of every ten cars on the road today do not currently fulfil EU environmental regulations that will take effect in 2021. And were you aware that certain emerging markets such as India will no longer permit the sale of new vehicles with combustion engines from 2030?

The future beneficiaries will be the Geelys of this industry: innovative companies with an eye for megatrends and a future-oriented business strategy. The logical consequence of all this is that the mobility companies of the “old” world are already playing catch-up.

Sustainable investments – refreshing and well crafted
The financial industry too is confronted by a paradigm shift. Climate change, commodity scarcity and population growth will pose serious challenges to society that can only be overcome with technological progress and sustainable solutions. Innovative concepts will leave outdated business models behind in the future, providing investors with the ideal blend of positive impact, alignment with personal convictions and promising return opportunities.

“The different drivers of the exponential growth rates of sustainable investment strategies will ultimately result in a refreshing and delicious cocktail.”

In summary, the different drivers of the exponential growth rates will produce a refreshing cocktail that graces the top of the menu and is frequently ordered – and served with a biodegradable straw for good measure, and heaven forbid that any ingredients would not be disclosed to the client!

Focus module “Equities Global Impact” – investing responsibly and sustainably
Invest with us in a sustainable future: with our “Equities Global Impact” focus module, which forms part of our innovative modular investment solution, we are meeting the exacting needs of our clients in the area of sustainable investment and thereby making our own contribution to a sustainable Swiss financial centre.

The following focus modules are currently available:

Aktien Schweiz Aktien USA
Nebenwerte Schweiz Aktien Schwellenländer
Aktien Eurozone Aktien Global
Aktien Deutschland  
Obligationen CHF Global Ausgewogen
Obligationen EUR Rohstoffe
Obligationen USD  
Obligationen Schwellenländer  


1 European Commission, “Overview of sustainable finance”: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_de
2 State Secretariat for International Financial Matters (SIF), “Sustainable Finance”: https://www.sif.admin.ch/sif/en/home/finanzmarktpolitik/nachhalt_finanzsektor.html
3 DACH region: Germany, Austria, Switzerland
4 Sustainable Investment Alliance, “2018 Global Sustainable Investment Review”: http://www.gsi-alliance.org/wp-content/uploads/2019/06/GSIR_Review2018F.pdf
5 Publisher insert of the Finanz und Wirtschaft forum of 29 September 2020, “Nachhaltig investieren”: https://www.fuw.ch/wp-content/uploads/2020/03/fuw-nachhaltiginvestieren_03-2020-li.pdf
6 Global Sustainable Investment Alliance, “2018 Global Sustainable Investment Review”: http://www.gsi-alliance.org/wp-content/uploads/2019/06/GSIR_Review2018F.pdf
7 Smart farming, digital farming or e-farming refers to the modern use of IT communication technologies in agriculture.
8 Source: Globalance, Bloomberg

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This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. The future performance of investments cannot be inferred from past price performance. In other words, the value of investments may increase but may also decrease, and the investor may be required to make additional payments for certain products. In certain circumstances, figures may refer to reporting periods of less than five years, which could reduce their validity. Predictions for the future are always non-binding assumptions. Figures presented in foreign currencies are also subject to exchange rate fluctuations, which can affect their performance. The information in this publication is in no way to be understood as an assurance of future performance. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets. Maerki Baumann & Co. AG holds a Swiss banking licence issued by the Financial Market Supervisory Authority (FINMA).

Editorial deadline: 21 October 2020

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