The Swiss market's high ethical standing
Swiss companies fare very well when it comes to sustainable development and environmental, social and governance (ESG) criteria. This makes them more attractive to investors, who are increasingly sensitive to these issues.
Interview with Guy Charlet, CFA, CAIA
Swiss equities manager, Banque Piguet Galland
Guy Charlet began his career in auditing before switching to asset management. He initially worked as an analyst and then a fund manager at Lloyds Bank before qualifying as a certified financial analyst and joining Piguet Galland in 2005. He manages the bank’s North American and Swiss equity funds. He is also in charge of the Helv-Ethic certificate, which Piguet Galland launched last summer in partnership with Ethos, the Swiss foundation for sustainable development.
How do Swiss companies rate in terms of sustainable development?
Guy Charlet: Overall, Swiss companies have a solid track record when it comes to corporate social responsibility, and they are not heavily involved in controversial sectors such as GMOs, nuclear power, coal, weapons and tobacco. The Swiss market has, by its very nature, a high ethical standing. More importantly, Swiss business leaders are increasingly aware that there are financial advantages to putting in place measures to reduce their company’s environmental impact, do good for the community and improve their corporate governance. Such measures can also help to reduce reputational risks, which can be very costly, as we’ve seen with the Deepwater Horizon catastrophe involving BP and Volkswagen’s Dieselgate.
Why are Swiss companies so far ahead in this area?
Various groups promote sustainable finance and its advantages at conferences and in publications. And organisations like Ethos also play an important role at annual general meetings, using their voting rights to improve corporate governance in the interest of shareholders. For Swiss banks, which have had to restructure in recent years, sustainable finance is a way of responding to calls from younger generations for more socially responsible investment options. By applying more of an ethical filter to their investments, they encourage companies to adopt better practices.
Are there any emerging standards aimed at stigmatising companies that don’t embrace sustainable development?
First, we have to distinguish between standards for companies and ethical selection criteria for investors. These two things are often confused. It’s certainly good to have a set of principles that guide corporate behaviour and standardised indicators to measures progress in terms of corporate social responsibility, like those provided by the United Nations Development Programme. But when it comes to investing, ethical pluralism is a must – individual investors should be able to follow their own moral code. Someone who wants to invest sustainably without totally excluding the nuclear sector, for example, doesn’t always have that freedom because of the ethical filters in place. As the great philosophers state in their moral theories, ethics cannot be imposed. On one side, you have proponents of rules-based ethics, who tend to systematically exclude elements they deem to conflict with the norm. For the nuclear sector, they may, for example, cite the need to preserve human dignity in the event of a nuclear accident or the problems of nuclear waste for future generations. On the other side, you have utilitarians, who will seek to achieve the greatest good for the largest number of people and will weigh the risks against other advantages. For nuclear power, this could be its lower carbon footprint. In any case, it is essential to guide the investor, giving them moral freedom without imposing standards that are set in stone.
Why have companies started to adopt ESG standards?
A modern, responsible company is one that seriously considers the impact it has on the environment, society and its shareholders. I really think that in the near future analysts will systematically look at ESG criteria and that companies that do not take them on board will trade at a discount. Companies that strive to meet these criteria will see their efforts rewarded over time.
Which Swiss companies really stand out in this regard?
Geberit and Givaudan have both developed very comprehensive sustainable development strategies, with detailed sustainability reports that meet strict requirements. Givaudan promotes biodiversity and plans to be fully reliant on renewable energy by 2025. Geberit is working to optimise the use of water resources and is one of only a handful of companies that pays the members of its board of directors in shares, thereby aligning the interests of the directors with those of other stakeholders.
Do ESG ratings affect share performance?
Results of studies depend heavily on the sample universe and the periods chosen, but they are nonetheless valid. Going forward, however, socially responsible investing should start to pay off even more. One of the arguments against socially responsible investing is the lack of diversification. But I don’t think this argument holds, because ethics is increasingly about how a company behaves rather than the sector it is in.
Are investors sensitive to this ESG bias?
Younger generations want more than just returns – they want their values to be reflected in their investment choices. Socially responsible investing represents a set of universal values that banks can draw on to really connect with their clients, especially since the returns eventually offered by socially responsible investing should further increase its appeal.
To go deeper
Alternative funds were able to fully tap into November's market rally. They are continuing on the uptrend that began in April and will record a solid rise over the year...
After some hesitation, OPEC agreed to increase output slightly in Janu-ary, undoing some of the decisions it made back in the spring. This change of course was welcomed by the markets, which can now focus on the expected increase in demand as the global economy returns to growth...
In November, additional COVID-19 restrictions were brought in across most of Europe, causing economic newsflow to deteriorate. Markets weren't rattled by this, however, and have instead remained focused on the recent drop in infection rates and the prospect of an effective vaccine...