Sustainable Investments: Questions and Answers

Help to solve the climate crisis while earning a good return? For many investors, that is the dream. This moneyland.ch guide give you the most important information about sustainable investments.

What are ESG criteria?

The term ESG is widely used in connection with sustainable and values-based investing. The acronym stands for Environmental, Social, and Governance. Whether or not a company is considered to be exemplary from an ESG perspective is determined based on various factors. However, there is no clear definition of the term. ESG criteria are not standardized, and different banks and fund managers use different criteria.

Table 1: Examples of possible ESG criteria

ESG stocks are often considered to be the opposite of sin stocks, but the border between the two categories is not always clearly defined. The term sin stocks is used to denote the stocks of companies whose activities are considered damaging or morally reprehensible. ESG ETFs typically exclude these companies explicitly. You can find more information in the guide to sin stocks.

How can I recognize how sustainable an index or a fund is?

Many stock index publishers also publish one or more ESG versions of a stock index. You can usually recognize these by the ESG designation in their titles. There are also exchange-traded funds (ETFs) and actively managed mutual funds that specialize in ESG.

Important: The term ESG is not clearly defined. The selection and weighting of criteria can vary broadly between different index publishers and fund managers. It is important to get informed in advance – by studying the factsheet of the index or fund, for example.

The Swiss Performance Index (SPI) is one example of an index that is also published in an ESG version. This Swiss stock market barometer is available in three different ESG sub-indices, each of which is published in both price and performance versions (see Table 2). A price index only accounts for stock prices, while a performance index accounts for both prices and dividends.

Table 2: ESG versions of the SPI

Data source: SIX. Date: February 15, 2024.

SIX uses ESG ratings from Swiss service provider Inrate to select the components of its ESG-based SPI sub-indices. Inrate rates companies using a scale ranging from A+ to D-.

How can I evaluate the sustainability of individual stocks?

When investing in individual stocks, the only way to gauge sustainability is to study the company itself. But understanding a company and its business and practices is a basic element of investing in stocks, regardless of whether or not sustainability is important to you.

Some companies publish ESG ratings that can help provide some orientation. Just be aware that the exact criteria can vary broadly between ESG rating providers, so results can look very different depending on the rating provider being used.

US financial services provider MSCI, which publishes several internationally renowned global stock indexes, is a good example. It rates stocks on a scale of AAA (highest rating) to CCC (lowest rating). You can find detailed evaluations for each company including, for example, the timeframe within which the company hopes to reach CO2 neutrality.

Sustainalytics and Refinitiv are two other companies that provide ESG ratings for stocks. Sustainalytics’ highest rating is zero points, and its lowest is over 40 points. Refinitiv rates companies between zero points (worst rating) and 100 points (best rating). Both of these provide breakdowns of ratings by category (environmental, social, governance).

Ratings from Swiss company Inrate, which are used for the SPI ESG indices, are not publicly available.

Table 3: The ESG ratings of the five most heavily-weighted companies in the SPI

Date: February 15, 2024.

The different and sometimes contradictory ESG ratings of select Swiss companies show that each rating agency uses its own criteria. It can be beneficial to find and compare ratings from different rating services in order to get a good picture of a company’s sustainability.

Many Swiss trading platforms also provide assistance in finding values-based investments. Some examples:

• Swissquote provides an ESG score with a maximum rating of 100 points for many stocks. You can use an interactive tool to find stocks that match your values. In the first step, you select criteria that are important to you, such as emission reductions, green innovation, or resource optimization. In the next step, you can exclude business fields that you do not want to invest in. Examples of excludable fields are coal mining, nuclear energy, and fossil fuels.
• The neobank Yuh, a joint venture between Swissquote and Postfinance, rates all of the available stocks on an ESG scale of zero to five stars. You can also select stocks based on certain values.
• Saxo Bank rates stocks on an ESG scale of one to five points. You can filter stocks based on the number of ESG points they have. It is also possible to search the individual ESG categories individually, and exclude stocks that have poor ratings in one or more categories.
• The neobank Neon lets you search for securities in specific categories. In addition to finance and technology, there is also a sustainability category.

How well do sustainable investments perform?

It is not possible to make a blanket statement about how well or how poorly sustainable investments perform. That is because the term sustainable investment, and the details of what it means, are not clearly defined. ESG does not have an official status, and is, to a certain degree, subject to personal interpretation.

But comparing the standard version of a stock index with its ESG sub-index can provide a clue. The below example with the SPI shows that the most selective ESG sub-index delivered the best performance over both three-year and seven-year terms (see table 3).

Table 4: SPI price index return comparison

Data source: SIX. End date for investment terms: January 31, 2024. Indices are sorted based on their 7-year performance. Date: February 15, 2024.

As with all investments, investing in ESG always comes with a risk of loss. The risk is higher if you invest in individual stocks. Returns are not guaranteed, and losses cannot be ruled out.

What are the problems with ESG?

Trying to use ESG ratings as your guide to sustainable investing can result in some problems. A major issue is that there is no clear, legal definition of the term ESG. Criteria are not standardized. The result is that each ESG rating provider uses its own benchmarks and criteria for evaluating ecological and social aspects. You can find detailed information in the guide to the problems with ESG.

If you want to be sure that a company’s business practices really are sustainable and correlate with your personal values, then you should not rely on ESG ratings alone. If you want to stay on the safe side, you should take time to study a company in detail in keeping with this investment rule of thumb: Never invest in something you do not understand.

More on this topic:
Compare Swiss stock brokerage accounts now
The problems with ESG explained
How to invest money in Switzerland