SwissThematics being a relatively new firm, has no excess baggage from the past, and has ESG integration as foundations of its investment analysis and portfolio management.
SwissThematics’ ESG integration into research
Background
Integration of Environmental, Social and Governance (ESG) is the practice of proactively incorporating material ESG information alongside traditional financial metrics into investment decisions. The objective is to improve the long-term financial outcomes (risk-adjusted returns) for the portfolios, and enhancing long-term value for end-clients.
A formal integration of Environment, Social, and Governance factors into the security analysis is based on access to data, thorough research, materiality analysis and active ownership assessment.
Adequate and regular trainings to the research, investment and product teams is a prerequisite in successful ESG research integration and effective active ownerships. This is why all our team members have completed advanced training on the subject and have been certified by leading training providers like UN PRI (UN Principals of Responsible Investing).
Through integration of ESG in investments research, our team at SwissThematics makes sure that the companies in which portfolio positions are initiated and maintained are committed to and are able to proactively create a long-term value. An integrated approach ensures clients have the benefit of full transparency and understanding of how their money is invested.
With our sectorial bias towards Disruptive Technology, an additional layer of due diligence is on understanding how new business models (asset light, platforms) redefine business purpose to traditional notion of shareholder value. We focus on assessing how ‘human centered’ are products and offerings of a company.
The case for embedding ESG into our fundamental research process
Environmental, social and governance issues are an important source of risk and opportunity. Inclusion of these factors in assessing investments, improves risk management and risk-adjusted return. This allows our clients to reach their long-term investment goals by providing resilient and well-constructed thematic portfolios. These portfolios are generally underweight (versus respective benchmarks) or totally omit businesses producing excessing greenhouse gases, or those that treat their employees poorly or that do not disclose directors’ compensations, and end up being high risk.
A key consideration on idiosyncratic risk assessment is about how a business engages with its stakeholders. These include regulators, clients, suppliers, employees, investors and communities. Assessing companies based on their business practices in relation to their stakeholders provides key insights into their risk profiles.
We acknowledge that social and technology changes as well as climate change and other environmental issues are impacting business models and offering them new opportunities as well as exposing to new risks. In terms of risks consider wildfire-induces bankruptcy, data privacy, premature license cancellations to supply chain issues, and the latest global pandemic that has exposed otherwise hidden weaknesses. Being ahead of curve in understanding these risks and adequately pricing them forms the backbone of successful integration of ESG analysis in SwissThematics’ investment selection.
Sustainability and climate-integrated portfolios that incorporate effects of changing business models, have proven to provide superior risk-adjusted returns to investors. All else being equal, it is more rewarding to invest in a company that helps society, benefits the environment and is well governed. This is well illustrated by the returns for 2020 for ESG strategies at fund, index and instrument levels. Over 70% of self-declared ‘sustainable’ funds ranked in the top half of their Morningstar categories for the 1H2020. Over a longer time, empirical evidence from the performance of sustainable indexes over the past decades also support the view.
Investors are increasingly at forefront of efforts, by integrating ESG assessments into their investment selection process and directing capital to responsive companies. Business leaders are faced with social pressure and are compelled to redefine the purpose of the companies they lead. Finally, the focus from regulators and governments is highly encouraging of burgeoning responsible investing, and therefore strengthen the case for integration of ESG in an investment process.
Our approach to assessing a company’s ESG practices and how that impacts our investment thesis
Our bottom-up fundamental analysis incorporates ESG factors in the stock selection process. The ESG factor analysis of a portfolio candidate company is studied alongside the investment analysis to inform an investment / or not decision.
The bottom-up process also allows detailed ESG-based adjustment of most relevant financial forecasts including revenues, returns on capital, operating expenditures and cash flows). Adjustments in company valuations are also made to reflect potential ESG impact.
In terms of research process and portfolio construction, ESG analysis for us is a qualitative exercise albeit use of selected screenings (violations of international norms such as human rights, labor standards and environment protection). Our ESG analysis relies on internal and third-party research. These resources enable us to create individual proprietary score for environmental, social and governance issues. These are then weighted to provide aggregate ESG score for the portfolio holdings and companies in the watch list.
While being active manager, we are also active owners, and regularly execute proxy votes based on best-practices that address ESG issues. We believe that an active corporate governance is an integral part of being responsible owners. In our meetings with company managers, we appreciate transparency and openness towards shareholders, especially on issues such as top manager compensations.
Our investment team members view themselves as long-term stakeholders in the businesses they invest in. If all other factors are identical, they pick the company that has superior ESG credentials, and in a similar fashion a sell/reduce decision could be a result of deteriorating ESG profile, and vice-versa.
With our sectorial bias towards Disruptive Technology, an additional layer of due diligence is on understanding how new business models (asset light, platforms) redefine business purpose to traditional notion of shareholder value. We focus on assessing how ‘human centered’ are products and offerings of a company. For example, Alphabet’s free suit of tools for education are not only useful in familiarizing students with Google applications but also help equip teachers with resources that allow them to work more efficiently. Alphabet is a long-held position in portfolios. Other technology companies are setting the tone in ESG adoption by incorporating their sustainability objectives into their business objectives, and we view this as an encouraging development. These companies have the prowess to bring about an impact in the lives of billions of people and influence for better, mass consumer behaviors. In addition, they are enabling other sectors (such as healthcare and Industrials) and industries to become more productive and deliver more sustainable business outcomes.
What sets SwissThematics apart as a sustainable actor in Finance
SwissThematics being a relatively new firm, has no excess baggage from the past, and has ESG integration as foundations of its investment analysis and portfolio management. We intent to establish ourselves at the forefront of investors pushing for sustainability and responsible business practices. Being early in the game, we intend to be counted among the pioneers of socially responsible investing and as well as among a rare breed of firms that are known for thinking ‘out of the box’. Our close linkages with the Ecole Polytechnique Federal de Lausanne (EPFL) allow us a unique perspective to the effects of future trends in science and society. Our firm is highly active in garnering research initiatives with leading innovation hubs and science labs in Switzerland, on top of fundamental and economic analysis.