Profitability 

Executive Global: What are the most significant ways that PROMEA facilitate impact investing, social housing and social enterprises? 

Ricardo Garcia: Having aligned PROMEA’s investments in 2023 to a Paris aligned decarbonisation path in only one year, the organisation is now focussing on enhancing its actual impact with an objective of tripling impact investing by 2030. In addition, we set ourselves a target to invest 5% of the total portfolio into green bonds by 2030. Current impact investments include for example renewable infrastructure (wind, water, solar and sustainable transport), investing into social housing in Switzerland and installing solar panels, as well as making our garages fit for electric vehicles in our direct real estate portfolio. Furthermore, we have and continue to seed net zero carbon fund solutions. This makes a cost-efficient Paris aligned decarbonisation path accessible also for smaller institutional investors and broadens our efforts beyond our own pension fund. Last but not least, we compensate the organisation’s own carbon footprint through the planting of trees.

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EG: What strategies do you deploy to maximise your Environmental, Social, Governance (ESG) profile in ways that improve your value proposition and keep you ahead of competitors?

RG: Our focus lies on the climate, while still demanding a better than average score in the social and governance dimensions. We repositioned the pension fund’s portfolio in only one year, including to a Paris aligned decarbonisation path. In the past, a decarbonisation path may have been enough for a strong ESG profile. In the meantime, expectations from stakeholders have increased when it comes to active ownership, impact investing and the speed of the decarbonisation. So these are the dimensions we will work on in the future. At the same time, in order to be truly sustainable we need to support other pension funds where we can, to broaden our impact. This happens for example through communication (see for example www.PROMEA.ch/nachhaltigkeit) and seeding net zero funds accessible for other pension funds too.
   

EG: What are some of the challenges associated with meeting the high demands placed on social security today?  
 

RG: Government funds are financially not on a sustainable path in the long term and citizens save too little money for their retirement. Moreover, social security is a complex matter for citizens. We support our clients through educational materials as well as events for firms and individuals. Moreover, we hold the security of our balance sheet dear and emphasise diversification and a defensive investment strategy to safeguard the security of our benefits.

 
EG: How does PROMEA maintain the balance between sustainability and profitability while investing in a risk-adjusted and cost-orientated manner? 

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RG: During the repositioning of our portfolio in 2023 to a Paris aligned path, we renegotiated all contracts with our external investment managers. At the same time, we reduced the number of investment managers, got rid of active bond and equity managers (given our limited resources for active manager selection) and established cleared interest rate swaps for a cost optimised interest rate management. This led to a sharp reduction on the running costs for equities, bonds and money market investments. As a result, we were able to get back to our stakeholders announcing an ESG repositioning of the investment portfolio with a lower, rather than a higher running cost. This process has won us a lot of support and saves us from difficult discussions in the future. Not only is it cheaper, but with a very low tracking error in equities and bonds we will avoid trade offs between sustainability and performance.
 

EG: In what ways do you see green mortgages and green bonds affecting the real estate market in the next 10 years as the world transitions to green energy? 

RG: Public surveys in Switzerland suggest that about half of all citizens demand from pension funds to invest in a sustainable manner. We have conducted our own survey among our clients, with the result being very similar. Accordingly, we expect demand for sustainable investments and with it, green mortgages and green bonds to increase. Following the public vote in 2023 on Swiss energy law, real estate has to be net zero by 2050. Accordingly, the preference for green real estate is broadening in the institutional real estate market, as it spares institutional investors from a lot of work. We see it with our own real estate properties how much work lies ahead of us to turn brown real estate holdings into green ones. In addition, buyers tend to charge for example the change from fossil to sustainable heating to the seller. For all these reasons, we think that the market for green mortgages and green bonds will grow also internationally, also as support for the climate may increase with higher temperatures in the future.

EG: How did your rigorous academic training with your MBA at INSEAD, prepare you to succeed in the higher echelons of social insurance? 

RG: INSEAD is about diversity, this includes diversity of views. This openness is helpful to listen to all stakeholders and avoid tunnel vision. In addition, the emphasis of the business school to build a better world and its global view, fit neatly with the cause for sustainability and its global dimensions.

EG: What advice would you give to institutional investors who wish to do their part in creating a brighter and more sustainable future? 

RG: Views on sustainability can diverge quite a lot, but ultimately all opinions matter to remain on a sustainability oriented path not only today, but also in the future. Hence, it is absolutely key to create a buy in from all stakeholders. Also, our own experience shows that we don’t have to sacrifice returns for investing sustainably. To the contrary, we have many examples leading to higher returns such as solar panels, renovating buildings while keeping the concrete structure, investing in sustainable private markets when liquidity is short and discounts to secondaries are attractive. Last but not least, the dialogue between institutional investors and sharing experiences is time well spent.  EG