Investing has changed in a major way: Returns are no longer the sole focus. Modern investors want to know the impact their money is having, as they weigh up ethical considerations against established metrics.

How significant is this investing evolution? An analysis by Bloomberg estimates that by 2025, ESG assets will comprise a third of global assets under management (AUM), totaling close to USD 53 trillion.

The growing number of conscientious investors integrating ESG factors into their investment decisions has fueled the proliferation of sustainable investment options. Institutional investors are becoming increasingly aware that‌‌ ESG standards drive value. The new challenge is learning how to integrate this into their investment portfolio. In order to do so, it is important to have a base understanding of what ESG-investing is and why it's growing so quickly.

What is sustainable investing?

ESG stands for Environmental, Social, and Governance. The term is often used interchangeably with others like Socially Responsible Investing (SRI) and impact investing, but there are subtle differences between these concepts that set ESG apart.

Essentially, ESG encompasses value-driven decision-making. It’s a framework applicable to both investors and companies. SRI, by contrast, is more granular because it is investor-facing and centered around ethical considerations. For instance, an investor may fund a company specifically because they donate a high percentage of their profits to charitable causes. Alternatively, they may decide not to invest in an organization because of misaligned values. The third term, impact investing, is simply the act of investing with the aim of investing to promote a social good.

Pivoting to the specific ESG criterion, it becomes clearer why this model has been integrated by a plethora of companies and investors. Let's breakdown these criteria below:

1) Environmental

This criterion can include corporate climate guidelines, energy use, waste, pollution, natural resource conservation, treatment of animals, and essentially anything relating to preserving the environment. Companies with the potential to produce excessive waste (e.g. manufacturers, energy giants, construction) may consider how to mitigate the negative effects of their operations, or even look for innovative solutions to eliminate the issues altogether. ESG can be a guiding light for any segment of the market planning for a profitable yet sustainable future. Similarly, stakeholders may wish to weigh up these factors when making decisions. Investors, specifically, may look to purchase stock in businesses that appropriately ‌evaluate and manage risks relating to sustainability.

An excellent example of this is Synhelion SA, a company within Moonshot’s own portfolio. They use innovative solar technology to reduce global CO2 emissions. The team at ETH Zurich is finding new ways to herness solar power instead of relying on traditional fossil fuels. This provides a cleaner, more renewable energy option. We’ll dive into it in more detail later on in this article.

2) Social

Social is, of course, people-centric. How does the company treat its employees? Does it treat everyone (employees and customers) ethically and respectably?

Stakeholders investing in ESG funds will care about how companies are interacting with communities and whether they’re “giving back” in some form or another. Groups adhering to these standards could think of creative ways to accomplish this.

A fascinating example of this is US shoe company TOMS, which garnered a lot of attention when they launched their buy-one-give-one (BOGO) model in 2006. This well-intentioned campaign stated that for every shoe purchased, TOMS would give a pair away to someone in need. However, over the next decade, the company discovered how difficult this model was in practice, and they simply weren’t able to give as many shoes as were being bought. There were concerns about TOMS' economic impact on local shoe companies, among a host of logistical nightmares.

Starting in November 2019, the company changed its famous model and stated simply that it would instead give away one-third of its profits to “grassroots good,” meaning charities, communities, cash grants, and more. TOMS has an “Impact” page on their website and links to reports detailing cashflow and their Certified B Corporation score: “B Corp Certification is a designation that a business is meeting high standards of verified performance, accountability, and transparency on factors from employee benefits and charitable giving to supply chain practices and input materials.”

Despite best intentions, the BOGO campaign proved unsustainable long-term, but TOMS pivoted and came up with a better solution by building on and incorporating the ESG criteria integration into their model.

3) Governance

As alluded to under the standards above, governance is how companies show transparency and accuracy in their operations. This can be anything from accounting to diversity.

Going back to the TOMS example, the reports on their “Impact” page are an example of transparency, fitting nicely into the governance criteria because they show the distribution of funds.

From an investor standpoint, a company’s leadership is another key factor. Stakeholders might require proof of transparency and as well as a confirmation that there aren’t any conflicts of interest. This too would fall under the governance criteria.

Why is sustainable investing a promising direction for the future?

J.P. Morgan Asset Management recently released an article outlining why they believe ESG investing is here to stay. At Moonshot, we believe they make an accurate assessment of why ESG is not just a fad or a passing phase. Sustainable investing appears to be driven by multiple factors, all of which reinforce each other for long-term staying power.

There are three pillars propping up modern finance: investors, technology, and companies. Regarding sustainable investing, demand is led by investors, technology drives innovation, and companies are being encouraged to take action. Also, there are new ways to invest in companies pushing for sustainability. Options like alternative investments democratize the investing process by opening the door for more people to invest and curate a portfolio aligned with their values.

The overarching theme is that a macroeconomic shift is happening, affecting all sectors of the market, regardless of whether a company is ESG-conscientious. While it may be possible to discount a singular reason for this shift, such as investor-led demand, but it would be asinine to disregard the multitude of factors that together point to large-scale market evolution.

In addition, evidence suggests that ESG-focused companies “fare better economically, which is mirrored in financial markets by better risk-adjusted returns,” according to ​​Norbert Rücker, Head of Economics & Next Generation Research at Julius Bär. This signals a mission-focused approach that brings purpose to an organization’s efforts and can drive results.

 

Corporate economic & Financial performance vs. ESG
Source: Julius Bär

BlackRock’s research shows that ESG indices are matching or even outperforming traditional indices. In line with this finding, the integration of ESG factors seems to point to a long-term positive impact on a company’s development.

Due to the success and popularity of ESG funds, some companies are “greenwashing” their brand by promoting their company as sustainable and environmentally-conscious when, in fact, the opposite is true. With increased adoption, it's no surprise that the effect is becoming diluted. This further points to the shift happening, and the importance of understanding ESG principles to make informed decisions.

What's interesting is how some investors have gone full circle where they are potentially investing in ESG funds, but ethical concerns are second-tier to achieving a “conventional investment aim: maximizing risk-adjusted returns” according to a study by McKinsey & Company. That's partly why it's important to understand the distinction between ESG and SRI types of investing, the latter being primarily concerned with ethical considerations.

The data demonstrates that positive returns and an ESG strategy are not mutually exclusive – quite the opposite. Investors are able to care about both the wider impact of a company's operations and the bottom line. In this article, we have used the term “integrate” to describe incorporating ESG factors, and that’s precisely what’s happening.

What makes Switzerland an exceptional location for sustainable investments?

Switzerland’s market for sustainability investments (SI) continues its impressive growth, according to the fifth and most recent installment of the Swiss Sustainable Investment Market Study (SSIMS), produced by the Swiss Sustainable Finance (SSF) and the Center for Sustainable Finance and Private Wealth at the University of Zurich.

 

Development of sustainable investments in Switzerland
Source: Swiss Sustainable Finance

As shown in the chart above, total SI investments have increased by 30% to CHF 1’982.7 billion. This collective increase comprises a 15% growth in SI funds, a 109% growth in sustainable mandates, and an 11% growth in sustainable assets.

According to the SSIMS study, the key underlying motivations for sustainable investing (by AUM percentage) include financial performance (40%), the desire to make a positive change (32%), and value alignment (28%). Combining the latter two reasons, 60% of the primary motivators for sustainable investing are not directly finance-related. The wider adoption of ESG approaches and the motivations behind them illustrate a market transformation taking sustainable investing mainstream, and both investors and companies are rebalancing their respective approaches accordingly.

Over the past year, Switzerland hit an incredible milestone. Looking purely at sustainable investment funds, the volume increased to CHF 799.5 billion. This follows the major milestone previously hit in 2020, where total sustainable investments surpassed conventional funds. This indicates that Switzerland is seeing great momentum and is continuing to build on it.

The connection between Switzerland, ESG investing, and climate change

Climate change is the underlying theme of the paradigm shift to sustainable investing, as indicated by the Swiss Sustainable Investment Market Study. The three significant reasons for this are as follows:

  1. Climate change risk management and reporting of climate change can be found on top of the list of all ESG engagement themes.
  2. Coal industry activity is now the highest-ranked exclusion criteria.
  3. In close correlation to the second point, clean energy remains at the top of the list of Sustainable Development Goals (SDG) that asset managers use to contextualize their financial products. This echoes the ESG decision-making framework companies are increasingly adopting.

How does Switzerland rank globally for its efforts? The Environmental Performance Index (EPI) is a ranking system developed by the Yale Center for Environmental Law & Policy that measures 180 countries based on their efforts across climate change, environmental health, and ecosystem vitality initiatives. Switzerland ranks in the top 10, evidencing that the nation is among the world's most advanced countries in regard to sustainability.

Innovative areas of investment

At Moonshot, we are proud to feature companies that strictly adhere to ESG standards in our portfolio. Let’s walk through a few of these companies to give you an idea of how they align with ESG principles.

1. Synhelion SA

Synhelion SA is an innovative company striving to reverse the fuel-burning process by converting CO2 back into fuel. With its research team based at ETH Zurich, Synhelion is revolutionizing fossil fuel production with breakthrough sun-to-liquid technology.

The company’s goal is to convert solar heat to manufacture syngas which can then be synthesized into kerosene. As for how it compares to fossil fuels, it’s cleaner, more affordable, and renewable. Impressively, Synhelion is reducing CO2 emissions by up to 100 percent.

As one of the jewels of our investment portfolio, Synhelion was crowned 2022’s laureate of the Aerosuisse Award for its groundbreaking ideas. This prestigious award recognizes exceptional contributions to the Swiss aerospace industry.

We’re very excited about Synhelion’s breakthroughs and the pivotal role it is playing in achieving net-zero carbon emissions in the aviation industry. Regarding ESG standards, Synhelion SA is a prime example of a company that directly integrates its ethos into its product.

2. Piëch Automotive

Piëch Automotive is a recently established electric sports car manufacturer based in Zurich and Munich. The company’s aim is to take classic and timeless designs seen in regular cars and apply that to electric sports cars. The target market is conservative car enthusiasts who don’t want their personal vehicles to look like spaceships jetting around on the streets. The thoughtful design tips the scale in favor of an electric car versus a gas one.

Speaking of design, one of the most noteworthy accomplishments by Piëch is the modular composition of their vehicles. This allows for the customer to make modifications and select from various body styles, playing to the buyer’s taste.

Piëch’s central ethos is to use innovation to propel the electric car market forward while also preserving the nostalgic feeling of driving an old-school luxury sports car. And, of course, its carbon-free fuel aligns with strict environmental standards.

3. Amēa Villas

Amēa Villas is transforming the timeshare market by giving small investors the opportunity to access ultra-high-end real estate in prime locations worldwide. Its unique model lets them stay in these spots while possibly earning returns on their investment.

Diving into what they do, Amēa develops modern luxury villas for holiday stays and exclusive events in some of the world’s most breathtaking locations.

The Amēa model looks like this: co-owners (investors) can reside at the property at no cost during pre-established timeframes in the low season. During the high season, co-owners can earn profits while the property is being rented out to international tourists and event organizers.

We’re enthusiastic about Amēa because of how they’re turning holiday homes into attractive assets and, at the same time, maximizing the occupancy of these properties. The goal is all-year occupancy, which benefits the local economy (shops, restaurants, and tourist attractions), the villa staff, investors, and everyone else involved.

Sustainability is not a trend; it’s the future.

Conclusion

Factoring in investor demand, innovation, corporate focus, increased research funds, and energy transition, the growth of sustainable investing is on an undeniable upwards trajectory. While there are obstacles to overcome, including investor acceptance and corporate adoption, more and more companies are committing to ESG standards, with the data easier than ever to capture. With this surge in businesses dedicated to sustainable business goals, investors are increasingly able to mitigate ESG risk in their investment portfolios, contributing to positive global change.

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