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Sustainable investing: combining complex data and a human touch offers many benefits

When it comes to sustainable investing, intermediaries have an opportunity to help clients invest in what really matters to them. And while ESG investment frameworks apply models that rely on large quantities of data, blending data and human expertise has a multitude of benefits, including reducing overall complexity – allowing sustainable investment themes to be matched to what clients care about most.

 

By Nic Dreckmann
Chief Operating Officer & Head Intermediaries, Bank Julius Baer                 

 

If there is a powerful trend to keep abreast of, it is investors’ plans for acting sustainably. Despite the ever-evolving regulations defining what sustainable investment means across the world, many investors view sustainability as crucially important, especially the affluent and the young. They are not only intermediaries’ core clients, but also those most important for future growth. 

Yet sustainable investing means different things to different clients – depending on their principles, values and interests. Additionally, there have been controversies surrounding ESG ratings and data for a couple reasons. Firstly, ESG is a very broad topic covering very different aspects with some clients choosing to focus on one particular topic. Secondly, most ESG ratings mainly determine whether ESG aspects pose a risk for a company, while some clients aim to invest in a way which has a positive impact on the world. These two points can be summarised as looking at the ‘how’ (current ESG ratings) vs the ‘what’ (what clients expect from ESG ratings).

For both of these aspects, ESG ratings are often not clear or precise enough, and having a personal touchpoint with a relationship manager and experts can help clients to align their investments with their values and objectives.

 

The human touch in sustainable investing

Matching clients’ ESG preferences to specific investments is clearly key, and in our experience at Julius Baer, this is best achieved by blending large-scale data analysis with human expertise. We started integrating sustainability into our business 16 years ago, and since then it has become clear how important it is to bring data modelling together with a human approach to make sense of this data. We describe this blended approach as ‘beyond artificially intelligent’.

Why does this combination work so well for sustainable investing? Largely because ESG data is different from traditional financial data. Rather than being purely quantitative, it includes a degree of subjectivity that requires careful evaluation. ESG data providers derive information from various sources such as company questionnaires, corporate disclosures, company engagement and industry research, but they do not have a common approach to ESG ratings. Instead, each provider uses their own proprietary technique to rate companies, which makes it, to some extent, untransparent for data users.

 

Enriching data, reducing complexity

Ideally, ESG investment frameworks avoid the standard models that rely just on large quantities of data, which can be complemented and enriched by in-house research teams. Carefully assessing and enriching ESG data in this way reduces complexity and helps achieve results and recommendations that can be understood with confidence. Importantly, companies can be linked to ESG themes that relate to common client interests, making investing more tangible and touching clients’ emotions.

At Julius Baer, we have developed a scoring methodology with scores based on themes related to the most relevant client interests such as climate, natural capital, or human capital. The scores enable us, firstly, to evaluate and summarise company performance in terms of ESG themes in an easy and understandable way. Secondly, they allow us to align instruments to individuals’ ESG preferences.

While sustainable investing is increasingly complex, it is important to match clients’ preferences to sustainable investments, using the findings from scoring processes. As a starting point, intermediaries can assess clients’ current portfolios. How sustainable are their investments? Do the clients agree with the values and missions of the companies issuing these securities? What are the risks and opportunities? 

 

Looking to the future

Julius Baer sees ESG and sustainable investing as a major topic for the coming years. We think that clients’ interests in sustainability considerations in investments will continue to grow steadily.

The dynamic regulatory environment, including industry standards, will contribute to this trend. It is increasingly defining and improving best practices in ESG disclosure and classification. With a varying degree of maturity depending on the jurisdiction, this leads to better ESG-relevant information and company data.

Sustainable investing is on an ever-evolving journey, and it is essential we stay on this path. Let’s approach this powerful trend for the greater good – for us, our intermediary partners and the wider world. 

 

 

Biography

Nic Dreckmann (born 1974), who holds a master’s degree in Business Administration and Corporate Finance as well as FRM accreditation, joined Bank Julius Baer & Co. Ltd. in 2004 and has been a Member of the Executive Board and Chief Operating Officer of Julius Baer Group Ltd. since 2016. As of 2019, he has also become responsible for the global Intermediaries business of the Julius Baer Group Ltd. Previously, he held various international positions, among other things leading several post-merger integration projects, for example the acquisition of the international wealth management business of Bank of America Merrill Lynch by the Julius Baer Group. He also served as Chief of Staff for the CEO and COO. He led several transformation projects related to the bank’s operating model and held roles in product management, strategic management, and business development. Before joining Julius Baer, he worked as a management consultant at Accenture.