SAM Gets Ready to Take on North America

by Matt Greco

If you havent heard of it yet, you will – sustainability investing is starting to establish a beachhead in the U.S. and Canada after gaining a foothold in Europe.

In many ways, it is the philosophical scion of socially responsible investing (SRI), which has become a major investment force in the U.S. at $2.15 trillion of U.S. assets (Social Investment Forum). Rather than screening out the bad guys though (traditionally alcohol, tobacco, gambling, nuclear and arms-related stocks), sustainability investing engages in positive screening, putting money into the good guys companies that are positive examples of sustainable business. As does SRI, sustainability investing analyzes the environmental and social impacts of running a business, which along with financial impacts are called the triple bottom line.

Whereas the SRI tradition is wrapped up in values and ethics, sustainability investing stays clear of ethics and measures concrete performance.

Swiss investment company Sustainable Asset Management (SAM), helped coin this new investment style; its principles and methodology govern the Dow Jones Global Sustainability Indexes, which SAM runs. Switzerland didnt have an SRI tradition and SAM built the sustainable investing approach from the ground up. Its pitch to customers is: investing in sustainability leaders lowers your risk and increases the performance of your portfolio.

Consumers will punish companies that dont practice sustainable management, CEO Reto Ringger says. And pension funds are beginning to realize the risk inherent in investing in unsustainable companies because the life spans of their pensioners are going to extend far into the future, long past the average life spans of companies on the S&P 500 – which is only 19 years.

Our first customer, Swiss Re, helped tremendously. It gave the right message to the market. It gave us a platform for others to come in, said Ringger.

SAM is growing by 40-50% annually and oversees US$4 billion in assets. In addition to retail accounts, SAMs customers include Swiss pension funds, Shell Oil, large churches and Munich Re. They also manage money on the fixed income side (as well as investing in private equity). Its still the early days, Ringger says. Nevertheless, he sees that more people and organizations want their assets to be managed on a sustainability basis. Before people invest they want to see a track record of three to five years. Some want to see 10 years. Were getting there.

Now, SAM is branching out into North America and is looking for a U.S. partner to use as a platform. The Province of Ontario has asked SAM to propose how they would manage a $500 million portfolio. Similarly, the state of Vermont has shown interest in parking some of its Treasury funds with SAM.

Currently, there is no Dow Jones sustainability index just for the U.S. market. The DJ Global Sustainability Index, which was created in 1999, however, does include US companies. Ringger notes that some US companies cant answer SAMs questionnaires because they have no carbon emissions data. But this is changing.

How DJSGI is Constructed
SAM selects its investment targets by sending a 2,500- question survey to companies for information that is not available in the annual report. We give them an incentive to fill it out – we use the information to benchmark their performance against their peers, which is helpful for them, Ringger notes.

For companies, bellying up to the sustainability bar is partly a matter of reputation management – and a way to sell more product. We see companies improving. Seven years ago we saw companies faking it – but its getting too tough to do that, Ringger says. Transparency is increasing. We talk a lot with companies, employees, and competitors. Its difficult to hide.

One reason it is getting more difficult to hide is the criteria have become less qualitative, more quantitative. The ability to measure carbon reduction is one major example. Were improving the criteria everyday, he says.

And its not just a matter of SAM checking up on the companies it researches. There are all manner of non-governmental organizations (NGOs) keeping tabs, as well as the media. All of this amounts to increased transparency, which is important to investors because it lowers their risk. Institutional investors around the globe are taking up the issue. They are starting to look at companies sustainability ratings to better assess the long-term risk of an investment.

Alois Flatz, who heads a SAM research team that includes 13 large cap analysts as well as others on the private equity side, notes that SAM starts its evaluative process for the Sustainability Index by looking at the 2,500 worlds largest companies. It analyzes 1000 of these, and 350 (the smallest of which has a market cap of about $700 million) make it into the Sustainability Index.

500 companies provide constantly improving information, up from 380 a few years ago. Its becoming more and more important to the companies themselves, Flatz notes. SAM re-evaluates companies once a year as well as constantly monitors them. There are those who participate actively, and another group we assess, who we think are good, using publicly available information, he says.

We might ask a manufacturer about its carbon emissions, for example. But we dont stop there. We verify the information by working with NGOs, and do media and stakeholder analysis to investigate more deeply, Flatz notes.

Companies are ranked within their industry using a best-in-class approach with a three-to-five year investment window. We use general criteria, industry-specific criteria and how companies are ranked within industry, said Flatz. This has meant in the past that some industries, like tobacco, have no companies in the index. Each year, PriceWaterhouseCoopers audits the ranking and index process to ensure its accuracy.

SAMs methodology is now accepted by companies. Its a road map for their internal development, Flatz says. SAM doesnt sell the data it collects, but uses it for its own clients and research. SAM is about to issue an executive study on carbon constraints based on this data, for example.

The sustainability asset management market has been growing at 25% a year over the last few years. Seven years ago it was at 200 million Swiss francs. Now its at 7 billion Swiss francs, still only about 2% of the 500 billion Swiss pension fund market. The good news is that leading institutions are discussing it now. Its having a big impact, Flatz says.

The DJSI has outperformed the MSCI World by 1% over the last three years. While that may not seem like much, critics were convinced that it would under-perform the broader indexes. when it launched in 1999. The DJSI is now at the point where company performance jumps when it is accepted into the index. One Spanish companys stock jumped 1% when it was placed in the index.

SAM also licenses the right for other portfolio managers to run their own DJSI-based mutual funds. There are 48 licensees around the world and total assets under management based on the DJSI family amount to 2.3 billion Euro.
There is also an exchange-traded fund listed in Paris, which models the pan-European sustainability index. These managers compete with SAM in aggregating sustainability assets, but SAM believes it adds credibility to the market.

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www.sam-group.com
www.sustainability-indexes.com