Sustainability Criteria in the Valuation Model for Swiss Equities

Sustainability Criteria in the Valuation Model for Swiss Equities

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Sustainability topics (ESG) have become increasingly important in recent years. These topics are not only attracting attention in society, but sustainable investments are increasingly becoming the focus of investors. But what exactly does sustainable investing mean, and how do you determine which investments are sustainable after all? Vontobel Equity Research has developed an evaluation model to get to the bottom of this very issue. Its evaluations of the Swiss equities that it covers will also integrate a sustainability valuation in the future.

What is sustainable investing?

ESG (environment, social, governance) basically means nothing other than the fact that companies must prove that they use resources like energy, water, and commodities sparingly and protect the environment during production (environment). They should also appropriately consider the interests of suppliers, employees, and clients (social) and must meet certain requirements for their corporate strategy and internal organization (governance).

For sustainable investments, investors should make sure that companies that are considered for investing fulfill ESG criteria and thus meet certain environmental, social, and corporate governance standards.

Risk vs. yield?

Contrary to stubborn opinions, ESG investors do not have to accept a loss of yields. Many studies show that ESG investing makes it possible to achieve higher yields or less volatility. Companies with better ESG standards seem to have lower capital costs, provide higher shareholder value, and seem to surprise the markets less often.

Powerful growth market

The market for sustainable investments is huge and continues to grow very quickly. According to the Global Sustainable Investment Alliance, the market for ESG investments is said to have been 30 trillion US dollars in 2018. In comparison, investment sums in 2010 had only reached approximately 10 billion US dollars. And this growth may also continue in the next few years. According to Vontobel Research, sustainable investing is not a temporary fad but a long-term trend. There are three primary reasons for this.

1) Our world is changing. Acceptance of ESG standards is not only being pushed by global warming or the demographic trend but also by new technologies, innovations, and increasing regulations.

2) A new generation – the millennials – is in the process of entering the world of investing. Sustainability is especially important to these young people, and they increasingly pay attention to sustainability when investing.

3) Technical advances will not only cause new innovations, but the quality of data and analysis tools will be continuously improved. They make it possible to generate more relevant approaches to ESG investments.

How do you quantify ESG?

It is not exactly easy to measure ESG precisely. There is a wide variety of models and ratings, but most of them are not particularly straightforward.

Vontobel Research has now integrated sustainability criteria into the valuations of the Swiss equities that it covers. A wide variety of ESG criteria are taken into account that may have a measurable and material influence on company valuations.

 

The price targets for covered Swiss equities have changed due to the new ESG criterion in the valuation model. Givaudan is in first place and is the ESG winner according to Vontobel Research. It is followed by Logitech, Nestlé, and SGS. However, it should be noted that these companies are very close to each other.

Givaudan

Givaudan has been focusing on setting sustainability goals for years. Recently the company set a new benchmark with its ambitious targets related to ESG. It set new goals in all ESG areas. The goals included a 70 percent reduction of carbon dioxide emissions by 2030 and becoming climate neutral by 2040. Single-use plastics are to be replaced by environmentally friendly alternatives, all employees should receive access to training sessions on mental and physical health, and diversity is to be increased. These are only a few examples. Givaudan’s goals are even more far-reaching, which according to the newly defined Vontobel standard, gave the company first place among Swiss securities when it comes to ESG.

Logitech

Givaudan is closely followed by Logitech. Logitech has also defined very clear sustainability goals. For example, Logitech’s goals include the promise to adhere to the restrictions defined in the Paris Climate Agreement to limit global warming to 1.5 degrees Celsius. Products and packaging should comply with sustainability and recycling considerations. The sustainability goals also include a far-reaching promise from the CEO to promote diversity and integration. According to the Vontobel analysts, Logitech earned second place in the new sustainability valuation.

Nestlé

As the market leader in its area, Nestlé has to be somewhat of a trailblazer, and ESG is currently one of the management’s highest priorities. Because of the size and diversification of this company, it receives regular attention due to alleged violations (environmental pollution, plastic, etc.). However, in recent years, the company has tackled ESG issues with a genuine feeling of urgency, which is confirmed by the many announcements and ambitious goals related to ESG, and some of these goals have set the benchmark in the sector.

SGS

ESG is deeply rooted in the corporate culture of SGS. SGS has set a goal to make a contribution to a better, safer, and interconnected world. SGS has more than 300 projects in the area of energy efficiency. Under the new leadership, diversity may increase, and internal and external corporate governance may also improve. The new, planned strategy also gives SGS the opportunity to rework its entire service portfolio when it comes to ESG. SGS is in third place along with Nestlé when all of these aspects are taken into account in the Vontobel ESG ranking.

*Disclaimer

Ratings may be changed by financial analysts. When preparing financial analyses, Vontobel and its analysts disclose any conflicts of interest. These disclosures can be viewed at any time at research.vontobel.com/Disclaimers/StockGuide.

04/12/2020 02:28:29

 

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