Case Study: Nest Collective Foundation

A pioneer in sustainable investment places greater emphasis on the carbon intensity of its portfolios.

Information on the organisation

Type of organisation Pension fund Assets under management CHF2.26 billion (as of 31.12.2016) Approximate asset allocaAsset allocation by asset class: tion (as of 31.12.2016) CHF bonds and loans: 20% Global bonds: 6% Swiss equities: 7% Global equities: 24% Real estate: 25% Others: 18% (Private equity, ILS, credit instruments, infrastructure, liquidity)

Asset allocation by region:

Swiss assets: 54%, before foreign currency hedging Global assets: 41%

Information on the organisation

Who initiated the drafting In the early 1990s, the Nest Board of Trustees already added of a sustainable investment social and environmental criteria to the investment guidelines at policy? the request of the Investment Committee. The aim was to ensure that the values of the institution and the pension fund beneficiaries are reflected in the investment policy. The more than 15,000 members of the Nest Collective Foundation also represent the values and objectives of Swiss public policy, which is geared towards the principle of sustainable development. What was the main The discussions, held over 20 years ago, focused on how motivation for this step? investments could be made in an environmentally and socially responsible manner. At that time, the spotlight was on other environmental themes, such as air pollution or waste management. Even so, it was already clear back then that preference should be given to green forms of energy, while energy generation with negative environmental externalities should be avoided.

What are the main components/content of the sustainable investment policy?

How was the sustainable investment policy implemented?

What resources have been deployed for this? The investment policy of the Nest Collective Foundation aims to promote sustainable business practices. The sustainability policy is based on two main pillars: the exclusion of negative business activities and the active selection of positive types of business. The first pillar considers guidelines, such as the Global Compact, and is meant to ensure that Nest invests only in economic activities that are compatible with generally recognised standards and conventions and that do not conflict with sustainable business practices. The second pillar involves the preference for financing environmentally and socially efficient economic activities based on an efficiency rating. The sustainable investment policy supplements the usual guidelines and objectives regarding risk/reward, governance, and investment process. Under the investment guidelines, as long as alternatives are available within the asset class in question, preference must always be given to the more environmentally efficient investment. The same logic applies to carbon intensity. Therefore, the analysis compares different forms of energy generation across the sectors (e.g., coal-fired power stations versus wind farms) and selects the most eco-efficient method for the sustainable investment universe (“best-in-service” approach). Portfolio management takes the Nest sustainability universe as a starting point and then invests according to financial criteria, such as share valuation or bond rating. The sustainability policy—and therefore the portfolio’s tilt towards low carbon intensity—is anchored in the investment guidelines. Carbon intensity is one element considered in the environmental rating process. Nest manages its assets by granting external mandates and has relationships with several asset managers. The actively managed portfolios are measured against common market benchmarks. Nest provides the investable sustainability universe to the asset managers. Separating sustainability research and asset management ensures that all portfolios are managed according to the same criteria. The carbon intensity of the equity portfolios has been recorded since 2015 and compared with a set target value. Based on the Nest investment guidelines, the sustainability rating company Inrate compiles the sustainable investment universe. An external specialist supports Nest in reporting the impact of sustainability on portfolio construction for listed shares. The other process steps, such as issuing mandates and reporting, are carried out internally.

What were your experiences with policy implementation?

What were notable difficulties?

What do you consider to be the main benefits of your sustainable investment policy? Implementation is essentially quite straightforward because it is based on a clearly defined sustainable investment universe. It does require a little more coordination, as several parties are involved. However, the additional resources still lie within the usual range of costs of active mandates and are mainly required during the implementation of a new portfolio. The best-in-service approach, which systematically identifies eco-efficient companies, also automatically leads to a portfolio with a low carbon footprint, as confirmed by values calculated ex-post. This fact remains true, although the portfolio has not been optimised to ensure minimal carbon intensity. The biggest challenge is probably to ensure clear communication between all parties involved in order to avoid any misunderstandings. This is particularly important as Nest is breaking new ground with its approach. With this approach, Nest was able to translate the institution’s and members’ values in a coherent manner and at the same time implement a successful investment strategy. Given the backdrop of greater awareness of sustainability themes (climate change, human rights), the investment policy also helps to protect the foundation’s reputation.