Transparency plays a key role in sustainable investing, says Andrea Ferch, Head Sustainable Investments at LGT.
Ms. Ferch, why is transparency such an important factor in sustainable investing?
Although a growing number of investors is becoming interested in sustainable investing, not that many people are actually invested in this segment yet. This is mainly because oftentimes, the necessary transparency, or in other words, readily accessible information, is lacking. For private investors, it’s usually not immediately apparent if the equities they hold are in companies that foster sustainable development with their products, or whether the exact opposite is the case. It may well be that investors who donate to cancer research out of conviction are at the same time investing in companies such as tobacco producers without knowing it.
That would mean they are invested in a way that goes against their personal convictions.
Yes, and this actually happens quite often. Which is why it’s important that financial institutions become more transparent and that the problem created by the lack of information be overcome. If people are given the facts about the potential effects of their investments, they will be prepared to take action.
And you think this will work?
Absolutely. I have yet to come across any investors who deliberately and specifically invest in companies that have a massive negative impact on the climate and the environment or whose products cause considerable damage to health. This transparency is necessary in order to be able to reconcile investments with a person’s values.
As an investor, how can I find out how sustainable my portfolio is?
Getting transparency is indeed not easy. Unlike institutional investors, who obtain information from specialized data providers, private investors generally do not have this kind of access. Banks are therefore called upon to make the necessary information available to their clients. In our securities account statements, we provide our clients with sustainability ratings for the individual positions in their portfolio, and the carbon footprint of their equity investments. This gives them initial points of reference that they can work with.
And you obtain these sustainability ratings from external ratings agencies?
No, we don’t buy ratings that have been prepared by third parties – we have developed our own rating method that we use to assess equities, bonds, funds and ETFs. The rating incorporates raw data from six sustainability data providers.
Do you already have enough data to be able to comprehensively assess a company’s sustainability, for example?
We have key figures and information on a large number of companies. This ranges from data such as CO2 emissions and information on social matters, such as health and safety standards, to details about negative incidents like cases of serious corruption. In addition, we use information that shows the impact of companies’ products and services on people and the environment. This enables us to do a comprehensive assessment of a company’s sustainability. We can calculate the environmental footprint of a portfolio and determine the contribution that investments make to the United Nations’ 17 Sustainable Development Goals. Our clients find this very interesting.
And what about the quality of this data?
That’s a very important point. The data must be high-quality in order to make reliable statements. The good news is that there have been a lot of positive developments in recent years in terms of data quality. Nevertheless, we do not rely blindly on the data, but also carry out plausibility checks.
What advantages do your sustainability analyses offer private investors?
On the one hand, investors can avoid investments that go against their personal values or are controversial from a sustainability perspective. And not just for moral reasons. Sustainable investments are also attractive from a returns perspective After all, companies that act with disregard for massive environmental damages caused during their manufacturing process not only harm humans and the environment, but also their reputation and their returns. On the other hand, it is possible to specifically select investments that contribute to solving global challenges. If, for example, climate protection is a major concern for you, you can selectively invest in companies that contribute to the energy transition through their products. Such companies can offer enormous growth potential.
So taking sustainability criteria into account also brings a financial advantage?
In addition to the benefits for people and the environment, higher returns are one of the major advantages of sustainable investing. The misconception that sustainable investing means sacrificing returns has long been debunked. Many studies show that sustainability brings clear financial advantages. I’m convinced that taking sustainability criteria into account will become increasingly important for successful investing. In addition, long-term trends offer attractive investment opportunities. Just think of organic food: a few decades ago, organic food was a small and sometimes ridiculed offering carried in specialized stores, but today even the discount supermarket chains are generating a lot of turnover with it.
The advantages are convincing. Shouldn’t the necessary information be available to all private investors by now?
I am optimistic about the future availability of sustainable information. Strong momentum is coming from initiatives in the Swiss financial center and at EU level. The financial industry will have to fulfill far-reaching disclosure obligations in the future and is working on creating increased transparency with regard to the sustainability-related opportunities and risks of financial instruments. The availability of information for private investors will therefore improve, enabling them to make more informed financial decisions in the future. It is now up to investors to set the course for their investments.
It is still difficult for private investors to understand how sustainable an investment really is and how their own investments affect the environment and society. The ESG criteria – E stands for environment, S for social and G for good corporate governance – have become established as assessment metrics in the financial industry. For the non-professional investor, however, access to this data is not easy. Andrea Ferch's team solves this problem: She has been working at LGT since 2007 and heads the Sustainable Investing team.