J. Safra Sarasin celebrates 30 years of sustainable investing
In this TextileFuture Newsletter we present you not only the portrait of a Swiss Private Bank that acted as a pioneer 30 years ago on sustainable investing. At that time, practically the importance of sustainability was not known to a greater public and also not for competing banks around the world. If you do follow the story, you will understand that sustainability is also hardship for a bank to establish a system that allows sustainable investment to their customers. We present this feature to you to give you new ideas for personal investment, but also more broadly what sustainability means in another sector. As we stated before, in most of the sector there are no binding definitions of sustainability, nor standards. But this Private Bank has tried to establish, what we require for the textile and textile machinery sector and related subsectors of the value chain.
Here starts the feature, for which we are grateful to the Swiss Private Bank:
Jan Amrit Poser’s guest editorial, he is Chief Strategist and Head Sustainability of the Private Bank J. Safra Sarasin
I am often asked if it is really true, that the Bank took up the theme of sustainability 30 years ago, long before it became a major trend. I usually answer that the journey actually started much earlier. Apart from the fact that our Bank was founded back in 1841, and, its track record since then demonstrates in itself our solid financial sustainability, we first focused on environmental protection back in 1980 when one of our employees published photos in the staff newsletter of the Bank’s paper recycling initiative. But the biggest change in financial analysis happened in 1986 – 33 years ago. A disastrous fire in the Schweizerhalle chemicals plant dramatically brought home to the residents of nearby Basel the connection between their own well-being, the environ- mental protection measures taken by companies and the effect on share price performance.
Sustainable investments take off
However, it took another three years until a viable investment concept was developed and the first clients invested in it. Sustainable investments have experienced a boom since then. While the mutual fund market was initially developed in the 1990s in response to small investors looking to invest their money in line with their personal values, after 2000 more and more institutional clients came to us looking to fulfil their fiduciary duty and to ensure the holistic management of their investments.
Just before the start of the last decade, we took the far-sighted decision to integrate sustainability-related criteria into all private banking mandates. The volume of assets managed according to sustainability aspects rose steadily. Our approach and our success were rewarded this year by winning the 2019 award for the Best Private Bank for Social Responsibility granted by Global Finance Magazine.
Global agenda focused on sustainability
The urgency stemming from climate change has put the global community on a new course. The Paris Agreement on climate change and the UN Sustainable Development Goals. The European Union assigns a key role to financial markets in its Action Plan got Financing Sustainable Growth. In the future, asset managers are likely to have to provide solid proof of the future viability of their portfolios with regard to sustainability.
Focus more than ever on sustainability
In this issue of our quarterly Newsletter, we describe how the journey started. We talked to contemporary witnesses and pioneers of sustainability within our Bank who were involved in this groundbreaking development at the time. We have documented the milestones in our long history of sustainability for a good reason: it is not merely a legacy associated with the past, but serves as a constant incentive to continue our role as opinion leader in this field. More than ever, our focus is squarely on sustainability and sustainable investments.
Interviews with the pioneers of sustainability at J. Safra Sarasin – “Sustainability must be an integral component of the Bank’s strategy”
The Bank started managing its first sustainable investment mandates 30 years ago. Jan Amrit Poser spoke with some of the pioneers, who showed the way forward and lead the Bank to achieve its current position, as Switzerland’s visionary and thought-leader in the field of sustainable investments. Reviewing past successes also produced some surprising findings. Among them was the fact that pioneering work always depends on a few people who persevere and focus on their end goal.
Interview with Kaspar Müller, Head of Corporate Finance of the Bank at the time, later Chairman of the Ethos Foundation (amongst others)
Mr. Müller, what was the original trigger within the Bank to consider sustainable investments?
The Schweizerhalle catastrophe on the night of November 1, 1986 started the ball rolling.
The sirens wailed, the radios reported toxic clouds, warning people to stay inside and keep their windows shut. Everyone was frightened – and for good reason! In our investment meeting on Monday morning the key question then came up: What should be done with Sandoz shares? The old stock market motto was “buy on bad news” but this time we could not simply carry on as before. It became clear to me at the time that financial markets do not operate in a vacuum, but are part of a broader economic picture. And. this also needs to be reflected in the strategy of a private bank if it is to survive in the long term. How did the Bank’s partners respond? Initially a little surprised, but then extremely positively. The partners Alfred E. Sarasin, CEO Hans E. Moppert and Head of Research Georg Krayer took my concerns on board, and commissioned me to head up a work group to carefully examine the associated challenges and opportunities for the Bank. We spent a long night with Mr. Krayer in the attic of the office in Rittergasse in Basel, Switzerland, discussing the importance of ecology for the Bank and for society as a whole.
What were your proposals?
The Bank’s success has been built on its active role in supporting many enterprises in Switzerland. Nowadays we would call this private equity. We visited companies that had been working in the area of sustainability for some time and we were keen to strengthen our business relationship with them. Of course, we also wanted to inte- grate sustainability criteria into our analysis of company shares.
But you must have met with some resistance?
Obviously it did take a while to implement the strategy. But you have to remember how things were back then: the UN had not yet produced a definition of sustainability, the term “ecological” was met with suspicion and most importantly, people were concerned about risks to the Bank’s reputation. The CEOs of listed companies with whom the Bank also had a business relationship responded in an irritated fashion to questions about social aspects that were raised as part of the Bank’s company analysis. As far as individual clients were concerned, however, I remember that especially children of wealthy clients showed a very positive response to this line of questioning.
What is your advice for the future?
The longer I spend on questions of ethics, and sustainability, the trickier it is to find straightforward answers. We are mistaken if we think that synthetic and politically negotiated indicators can restore the planet’s natural equilibrium. Sustainability is a pro- cess rather than a final state, so we must constantly reflect on the challenges it presents. Sustainability must also never be limited to investments alone, but must rather be an integral part of the overall culture and strategy of a bank or enterprise.
Interview with Rolf Wittendorfer, former Member of the Executive Committee in charge of institutional clients, fund management companies and marketing, as well as acting as Chairman of the Building Commission
Mr. Wittendorfer, whose idea was it toensure the Bank’s new head- quarters was designed with sustainability in mind?
At the time, some analysts had started to think about sustainable investments. To be consistent, we also wanted to incorporate sustainability criteria into the design of the new building. We asked our employees about their requirements and did all we could to ensure they were met. Firstly, we made sure that paints and carpets were free of harmful substances. Secondly, we avoided tropical woods and used only local oak. The façade was intentionally light, clad with stone from the Jura. The roof was fitted with what was the largest solar system of that time, and the waste heat from our computers were reused for heating.
What did you do once the building was finished in 1993?
We set up the fund management companies, which I then took charge of. I was also responsible for the Bank’s marketing efforts. Working with Christoph Fuchs, I built up our fund distribution for external brokers, life insurance companies and regional banks. Then we launched a range of funds – including the first balanced fund managed according to environmental criteria – and registered them in many countries.
Do you have any advice for us?
I think some values will always hold true. First, the quality of the Bank’s products and services must always be excellent. Second, the focus must always be on people, and client relationships must always be personal.
Interview with Christoph Fuchs, Head of Fund Distribution at the time
Mr. Fuchs, why did the Bank launch the first sustainability fund?
It was the dream wedding of our two core competencies: investment strategy and sustainability. The Bank wanted to bring this solution to a broader public. It is important to see this in the context of that period: awareness was increasing as people became more and more concerned about protecting the environment.
How did clients respond?
Initially many clients certainly did not yet understand that a growth investment theme like ecology, as well as more careful scrutiny of a company’s sustainability credentials, could actually reduce the investment risk or generate a higher return. Our job was to explain this to customers, and also prove it by achieving a strong investment performance.
That in turn has a lot to do with credibility. Unlike a big universal bank that has to cater for all possible needs, a private bank can specialise in a theme like sustainability and become a true pioneer. Our next step was to launch funds focusing on themes such as water or technology, which attracted a lot of client interest. The business steadily grew, and it was not long before investments reached the first billion.
Do you have any advice for us, Mr. Fuchs?
Banking is still a personal business. Customers want to see a face, someone they trust. That was always the case in the past, and will continue to be in the future. Stay exactly how you are: sincere and open to new ideas.
Interview with Hans Weber, the Bank’s first sustainability officer and tireless pioneer
It is impossible to set an entire bank on a sustainable course without the tireless commitment of its employees. Hans Weber was one of these pioneers whose involvement made a decisive contribution to the success of our strategy. Back in 1980 an edition of the staff magazine “The Oak Tree” carried a photo reportage of the Bank’s paper recycling initiative. In 1988 he introduced a new waste disposal concept for the Bank. Thanks to his close relation- ship with partners, he was almost like the Bank’s environmental conscience. “Be careful to ensure the internal credibility of sustainability,” he repeatedly warned.
Thanks to his initiative, the Bank set up a new position of sustainability manager in 1997. He was the first to occupy the post and immediately set ambitious targets.
J. Safra Sarasin signs the UN Principles for Responsible Banking – Principles for Responsible Banking
As pioneers of sustainable investments, we were founding members in 2006 of the UN Principles for Responsible Investment (UN PRI). This year, we are once again on the forefront of sustainability initiatives. On September 22, 2019 we signed up as founder members to the UN Principles for Responsible Banking at the UN Climate Week in New York. By signing up, the 125 or so banks commit to aligning their business strategy with sustainable development goals. They strive to continuously increasing the positive impacts while at the same time reducing the negative effects on people and the environment.
This includes working responsibly with our clients to promote sustainable practices. We proactively consult with relevant stake- holders. To this end, all signatory banks aim to establish effective corporate governance and a culture of responsible banking. This will be reported on regularly and transparently.
Our CEO Edmond Michaan: “Sustainability is an integral part of our brand. We are “Sustainable Swiss Private Banking since 1841” and our goal is to embed sustainability in every part of our business strategy.”
Milestones in sustainable investments at Bank J. Safra Sarasin- How it all started…
The massive fire in the Schweizerhalle chemicals plant prompted a rethink in the Bank’s financial analysis department. As the first private clients started to show an interest in sustainably managed mandates and we launched the first fund specialising in eco- efficiency, the unparalleled success story of sustainable investments started in our Bank.
It all began with an accident …
The date was the first of November, 1986. In the Schweizerhalle industrial complex near Basel, a ferocious blaze broke out in the warehouse of the former chemicals company Sandoz. The flames were 60 metres high and could be seen from far and wide. The water used to fight the blaze turned the river Rhine red. Swarms of dead fish floated down the river. A stinking cloud of smoke drifted towards the city of Basel. People were afraid, even more so due to the lack of information provided by the company and the authorities. The full extent of the catastrophe did not become clear until later on: around 30 tonnes of crop protection agents and insecticides had been washed into the Rhine.
… that highlighted the importance of ESG Only six months before, one of the biggest accidents to date had occurred in the nuclear plant at Chernobyl. The global commu- nity was shaken and alarmed. But while Chernobyl was essentially a human catas- trophe, the accident at Schweizerhalle was also a financial disaster. The share prices of those companies affected came under massive pressure. As our analysts met on the Monday morning after the accident, it was clear that a new era had begun for them. It became very obvious that beyond pure sales and balance sheet figures, other important factors influence earnings expectations and thus company share prices, such as human health and environmental risks – and their management. Social factors, such as the treatment of employees, and a transparent information policy for residents living near a factory, also have an impact on the share price. The liability of managers for any damage caused, along with the firm’s governance structure, were also apparently more relevant than previously assumed. All this had to be incorporated into the analysis from now on. But the question was: how?
1986: Search for viable concepts
The idea of ESG analysis was born, but now viable concepts had to be produced to re- flect these criteria in investment portfolios as well. An intense debate began on the essence of sustainability. What are sustain able business practices? What is a sustain- able activity? What is a sustainable prod- uct? Are wind turbines sustainable, but the copper used in their construction too dam- aging to the environment? Is it possible to weigh up environmental and social criteria against each other? Is the sustainability rating the most important aspect, or is the financial appeal of the share what counts? Is the best approach to avoid investing in shares traded on the secondary market and only invest directly as a major shareholder in companies from the region, in order to retain full control? Naturally it took several years before the first concept emerged.
1989: Clients with convictions
The time was ripe for sustainable mandates. Although sustainable mandates were original- ly devised in a factory setting, it was the clients themselves who ensured the success of sustainable investments. The initiative came from the heirs of successful entrepreneurial families. They had inherited sizeable wealth, but were critical of the way their ancestors had managed the business. In the 1980s, the scandals surrounding dioxin transports, aggressively advertised infant milk and the chemical accident at Schweizerhalle prompted lively public debate. This led to a fundamental rethink in these families. Many heirs were keen to let their money work to support a more money work to support a more sustainable economy and avoid controversial investments. A series of customised mandates then marked the start of J. Safra Sarasin’s success story.
1991: First environmental seminar
The Bank’s archive contains a portfolio and the associated financial studies on individu- ally selected shares. The selection focused on bonds issued by Swiss water utilities and the shares of recycling plants in Norway and the UK. The concept and portfolio were presented as part of the first environmental seminar organised by the Bank back in 1991. In his welcome speech to participants, the Bank’s CEO at the time, Hans E. Moppert, personally stressed to clients that the issue of ecology had become so important that he could not imagine any financial analysis in the future that did not include sustainability aspects.
1994: The first eco-efficiency fund
The concepts of sustainable asset man- agement quickly became a success. In 1994 the Bank decided to offer sustainable investment solutions to a broader public as well. OekoSar, the first balanced mutual fund managed according to eco-efficiency criteria, was launched. This fund combined the Bank’s well-established asset manage- ment skills with its more recently acquired expertise in sustainability analysis. OekoSar soon became a success story. The core of our sustainability analysis at the time was, as it still is today, the Sustainability Matrix® developed and patented by our in-house team. Based on the two dimensions of industry rating (X axis) and company rating (Y axis) we establish our best-in-class and best-of-classes sustainability universe (shaded area).
Extension to additional asset classes
We subsequently extended our sustainability analysis to more and more asset classes. While the focus was initially on large cap listed companies, small and mid-caps were included from 1998 onwards. Then, in 2002, sovereign bonds were added, followed by direct real estate investments in 2009 and emerging-market issuers in 2010. Prior to that, the Bank had decided to take the far-sighted decision to switch the man- dates of private clients completely over to sustainability.
Sustainability integrated into every step of the investment process
In 2013, we decided to integrate sustainability more systematically than ever in our investment process. This was prompted by the realisation that the commonly adopted approach of simple exclusion criteria is not sufficient. Rather, the value-adding potential of the wealth of available ESG data can only be fully harnessed if it is applied along the entire value chain of asset management. In addition to constructing the sustainable investment universe, sustainability aspects are now also embedded in our thematic financial analysis. And, sustainability data can also enhance analysis in the areas of portfolio construction and reporting, as well as in the dialogue with companies or in annual shareholder meetings. After 30 years of sustainable investing, we are convinced that only the systematic use of sustainable investment tools in the investment process can help reap the full benefits and opportunities.
Sustainable Investment Research – Selected sustainability profiles and ratings in the third quarter of 2019
Link REIT: the first REIT to have issued a convertible green bond, globally
The principal activity of Link REIT and its subsidiaries is investment in retail proper- ties and car park operations in Hong Kong. Link has robust corporate governance prac- tices in place when compared to industry and regional peers. It has integrated sus- tainability into company strategy, which Link identifies as a key driver to enhancing stakeholder value. The commitment to sus- tainability is demonstrated in Link’s deci- sion to be the first Hong Kong company to issue a green bond and first REIT to have issued a convertible green bond, globally. Link also identifies goals in which it seeks to enhance its performance and publishes specific targets. Despite positive aspects, improvements against peers remain to be observed in key environmental and social areas, including green building certification and resource management. Overall and on a relative basis, Link displays an average sustainability performance and is therefore eligible to the investment universe.
Microsoft: fit for a tougher future on privacy regulation
Microsoft displays a balanced and relatively robust approach to sustainability challenges typical to it business. Indeed, privacy and data security risks which could affect its business model are mitigated through thorough mechanism under direct board level overview. Indeed, Microsoft’s approach to privacy issues including providing software users with advanced control on related settings and driving international initiatives such as the Global Network Principles are positive indications on the company’s pre-paredness for tougher regulation including the recent European General Data Protec- tion Regulation (GDPR). On the environmental side, significant efforts are deployed to reduce the company’s footprint which is primarily related to its data centres and hardware business. Governance practices are in line with industry standards and pro- vide shareholders with a reasonable ability to oversee and influence the company’s development. Overall and on a relative ba- sis, Microsoft is therefore eligible to the sustainable investment universe.
Xylem: providing solutions for a dryer future Xylem is an American industrial machinery company and it effectively addresses typical sustainability risks in its sector. Indeed, the company displays above average efforts to mitigate its environmental footprint while being focused on providing solutions to water challenges globally. In particular, Xylem’s product and services directly ad- dress the full water challenges cycle from collection, distribution to analysis and recy- cling. Furthermore, the company is develop- ing its business in data analytics reinforcing the relevance of its offer and the resilience of its revenue while improving the potential for sustainable water management globally. From a social perspective, Xylem is on par with its peers in addressing operational and cost risks related to labour management. Governance practices are globally well aligned with shareholders interest. Overall and on a relative basis, Xylem therefore displays an above average sustainability profile and is eligible to the sustainable investment universe.
Barry Callebaut: aiming to become carbon and forest positive by 2025
Barry Callebaut is the world’s largest cocoa processor. The key sustainability challenge for the company relates to sustainable cocoa sourcing. The “Forever Chocolate” sustainability strategy addresses related issues such as farmer poverty, climate change and labour rights. Negative newsflow related labour issues in the Ivory Coast and Ghana continues to exist.
The company has set the meaningful, but ambitious target to be carbon and forest positive by 2025. A number of measures are already applied and planned for the future with the goal to protect ecosystems that provide chocolate ingredients. Current efforts that relate to reducing CO2 emissions (from scope 1 to 3) already put the company at the forefront of the industry.
From a corporate governance perspective, investors should know that the company has a controlling shareholder. The Jacobs family currently holds around 50 % of out-standing shares. With regards to the remuneration policy, we are expecting adjustments that should reflect longer vesting periods for equity awards granted to executive members in order to ensure to better alignment with long-term minority share- holder interests. Overall, we assign an above average sustainability rating.
Sustainability Rating Methodology
The environmental, social and governance (ESG) analysis of companies is based on a proprietary assessment methodology developed by the Sustainable Investment Research Department of BJSS. All ratings are conducted by in-house sustainability analysts. The sustainability rating incorporates two dimensions which are combined in the Sarasin Sustainability-Matrix®:
Sector Rating: Comparative assessment of industries based upon their impacts on environment and society.
Company Rating: Comparative assessment of companies within their industry based upon their performance to manage their environmental, social and governance risks and opportunities.
Investment Universe: Only companies with a sufficiently high Company Rating (shaded area) qualify for Bank J. Safra Sarasin sustainability funds.
When doing a sustainability rating, the analysts in the Sustainable Investment Research Department assess how well companies manage their main stakeholders’ expectations (e.g. employees, suppliers, customers) and how well they manage related general and industry- specific environmental, social and governance risks and opportunities. The company’s management quality with respect to ESG risks and opportunities is compared with its industry peers.
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