Responsible investing is becoming more important for pension funds

The Publica pension fund recently began using a democracy index to evaluate its government bonds. Countries that violate fundamental democratic principles are no longer included in the investment universe.

The federal pension fund Publica has recently started focussing more on tangible assets and equities and less on bonds. For market observers, this change of course has come a little late. However, Publica Director Doris Bianchi counters that bonds are still the investment category with the highest weighting in the new investment strategy. For the period from 2022, the scenario of stagflation - i.e. higher inflation combined with reduced economic growth - has been weighted more heavily than before. In this scenario, it makes sense to focus more on tangible assets, as these generally offer better protection against inflation than bonds. The overall portfolio would become more balanced because of the investment strategy adjustment.

The focus is on sustainability

Tangible assets also include the new infrastructure investment category. The focus here is on renewable energies, among other things. Half of Publica's infrastructure investments, amounting to around CHF 1.2 billion, are invested in funds, while the other half is invested directly - together with other institutional investors. Publica aligns its investment strategy with the requirements of the Federal Law on Occupational Retirement, Survivors', and Disability Pension Plans (BVG). This stipulates that the pension fund must generate a normal market return. Publica cannot therefore deliberately forego returns. However, Bianchi is clear that in many areas it is not a case of either or, i.e. either returns or sustainability, but both and, by identifying important risks and opportunities. She adds: «Responsible investing is very important to us, which is why we have been applying a cross-investment sustainability strategy for eight years. »

What improvements have already been achieved?

In 2016, Publica initially excluded coal producers from its investment universe. This was based on a risk-return analysis. In terms of equities, Publica is now also guided by a climate-efficient equity index that identifies risks and opportunities for each company. For its real estate in Switzerland, which Publica manages directly, Publica aims to halve greenhouse gas emissions over the next twelve years compared to 2019. In addition to environmental aspects, responsible investment also includes compliance with good governance and social standards. These issues are addressed in dialog with the companies. Publica recently started rating government bonds using a democracy index. Countries that violate fundamental democratic principles will no longer be included in the investment universe in future. However, the application of the democracy index has only been in the implementation phase since 2023. The reallocation will be staggered over time. The portfolio also contains securities from tobacco companies, which is why the Swiss Lung Association is calling for these securities to be excluded.

When excluding securities, Publica follows the normative requirements arising from international law. For example, it has excluded companies that manufacture banned weapons. Regarding to investments in tobacco companies, Switzerland does not have any requirements under international law that could be relied upon. And there is no reason to exclude them based on risk-return considerations. «Ultimately, politics is responsible for tobacco prevention - and not the pension funds», continues Bianchi. There is also the question of whether, according to this logic, alcohol producers or gambling providers, for example, should also be excluded.

The impact of divestments in the real economy is limited

In contrast to Publica, the Dutch pension fund ABP also excludes oil producers. Publica, on the other hand, relies on dialogue with these companies. Because: «The effect of divestments in the real economy is limited. As a shareholder, however, we can have a direct impact on a company. As Publica alone is too small to achieve a leverage effect, we are a member of investor associations such as 'Climate Action 100+' or the 'Swiss Association for Responsible Investments' and can therefore represent our interests more effectively», explains Bianchi.

Greenwashing remains an issue

The market for sustainable investments has grown considerably in recent years. As a result, according to Bianchi, it has become increasingly difficult to distinguish the genuine sustainable investments from the others. She explains: «It is therefore important to us that we have data providers that are as independent as possible and use objective, high-quality data. We are currently examining our fund vehicles closely. »

The full interview with Doris Bianchi can be found under this link.