In the bank-wide sustainability policy the relevant ESG aspects are defined. We review our sustainability policy on a regualar base. Additionally, detailed guidelines exist for all SRI products and describe the combined investment approach with exclusion criteria and best-in-class selection. Internal guidelines describe the scope of each exclusion criteria in depth and describe the indicators as well as the scoring mechanism used in the selection process. Zürcher Kantonalbank's sustainable investment funds, which were marketed under the Label Swisscanto Invest (Zürcher Kantonalbank did integrate the Swisscanto Group 2014), were awarded the transparency Code (Transparenzkodex) by Eurosif, the European Sustainable Investment Forum.
Investment approach for actively managed Equities by the Asset Management of Züricher Kantonalbank
- For all listed equities we systematicly exclude controversial weapons
Backed by academic theory and long-term practice insights we believe that
- owning companies that are both high quality businesses and inexpensively valued is the best way to generate sustainable long term investment performance which inherently is also a sound way to limit risks on the downside.
- a bottom-up driven stock selection process that combines a ROIC-based screening approach with a rigorous, well-structured fundamental research yields superior investment returns over a time horizon of 3 to 5 years.
- quality in our view stands for companies with competitive business models (i.e. attractive ROICs), proven management track-record, a strong financial position as well as an attractive ESG risk profile.
- value in our view stands for companies which trade at a lower Enterprise Value (EV) to Invested Capital (IC) multiple relative to the “fair” EV to IC multiple implied by the Return on Invested Capital (ROIC), the weighted average cost of capital (WACC) and the long term earnings growth rate.
Our investment approach is thus focused on realising premiums from companies with attractive quality and value characteristics. Our goal is to achieve superior investment results by identifying companies trading at attractive valuation with a solid track record in ROIC generation and that operate in a high quality business from a fundamental and ESG perspective.
Our ESG-Assessment aims to achieve the following goals:
1) We want to avoid investing in companies which have an unfavourable risk-return-profile, due to material ESG risks not yet (well) reflected in the valuation. We strive to identify potential risks to shareholders which could disrupt the share price.
2) We want to improve our understanding of the key economic drivers of each industry by addressing the key ESG challenges per industry
How we assess ESG-aspects?
The in-house ESG research team provides a database and a template which allows PM/Analysts to calculate the ESG indicator (ESG-I) for each company of the MSCI AC World Index and displays it graphically. ESG-I primarily act as a risk management tool for limiting downside risk, improve quality analysis and, thus, systematically increase the level awareness among all participants in the fundamental investment process for ESG. The ESG indicator and its sub-scores in the environmental, social and governance field are ranked on a scale from one to ten and illustrated by colours from green (i.e. good) to red (i.e. bad). The scores rank a company within its global peer group industry (GICS level 3). If and only if the company investigated scores on the lowest three ranks, i.e. on one of the three lowest levels (dark red, light red and orange / right-hand side of the scale), the PM/Analyst has to explain the materiality of the ESG issues and whether or not the ESG issues are already reflected in the share price in his or her quality assessment. When addressing the ESG issues, PM/Analysts are required to discuss the potential impact on valuation with the different ESG analysts to better understand whether the ESG issues are sufficiently reflected in the share price. These ESG issues are mostly sector relevant and should be addressed during an interaction with company and/or broker/analyst.
We review our invesment policy and our ESG-Assesment on a yearly base.
Comprehensive Publication of ESG-Integration in listed equities (German): https://www.zkb.ch/media/dok/corporate/nachhaltigkeit/fokus-nachhaltigkeit-2016-07.pdf
Sustainable products: Focus on a high "sustainable impact" =>for all actively managed fixed income & equities
Ex-ante exclusion criteria: => Anthropogenic climate change – Extraction of fossil fuels – Operation of fossil-fuel power stations – Production of cars and aircrafts - Airlines => Endangerment of the Earth's atmosphere – Production of substances that deplete the ozone layer => Loss of biodiversity – not sustainable forestry – not sustainable fishery and fish farming – not sustainable palm-oil plantations – Genetic engineering => Threat to society and health – Nuclear energy – Production of arms and war material – Production of tobacco and smoking – Exploitative child labour.
The application of the exclusion criteria is followed by a sector analysis: The aim is to extract those companies in their respective industries and regions that set an example by excelling at taking responsible actions in terms of environmental protection, social and governance issues. The selection of is based on a multi-step process. The quantitative analysis compares roughly 50 environmental, social and corporate governance indicators. The data is obtained from specialized providers (such as Asset4, Trucost, MSCI ESG Research & Governance Metrics or RepRisk). Then, we carry out a qualitative product and sector analysis, which is mainly built on the know-how, experience and industry-specific knowledge of our analysts.
The sector analysis is followed by a fundamental stock analysis with a strong focus on companies with a high "sustainability impact". The following investment opportunities were defined: Energy: Renewable energy, energy efficiency. Sustainable Mobility: Public transport, Individual transport. Knowledge: Education/Research, Interlinking. Health: Access to basic health supply, Preservation of health. Finance: Access to financial services, Financial infrastructure. Resources: Efficient use of water, resource efficiency.
Sustainable Fixed Income Assets: Special research process exists for different types of fixed income of supranationals, cities and SSA (Analysis of countries).
Investment approach for actively managed Fixed Income Assets:
- For all listed companies we systematicly exclude controversial weapons
- For all listed companies we incorporated ESG-Data into the portfoliomanagementtool of our fixed-income fundamental management team.