ARTICO Partners: Combining Investment Performance, Sustainability and Climate Objectives

“ARTICO Partners’ policy has always been to invest in companies that are fundamentally good,” says CEO Gabriel Herrera. “Over time, this has been enriched by incorporating responsible investment criteria and concrete carbon footprint objectives into the investment process.”

The team at ARTICO Partners has been together for 11 years, a journey which has seen the company recognised as Switzerland’s Best Sustainable Fund Manager for 2021. “The key, at every step, was to preserve the fundamental qualities of the portfolio while achieving a quantum leap in terms of ESG scores and carbon footprint,” says Herrera.

Integral to sustainable investing is the adoption of negative exclusion criteria, which limits the available investment universe to varying degrees. A light ESG-exclusion approach has only a marginal impact. A strong ESG-exclusion approach means investing only in best-in-class companies, which can be overly restrictive. ARTICO Partners’ approach is to obtain maximum sustainability impact with a moderate restriction of the investment universe.

Applying sustainability and ESG criteria across all ARTICO funds has been a complex, multi-dimensional task. Engagement and voting are important components of a sustainable strategy: shareholders can and should actively engage with management to achieve ESG progress. Most large-scale and passive investors choose this avenue, given their broad and static portfolio holdings.

Small, active managers such as ARTICO Partners are able to avoid companies with significant ESG issues. Investment candidates lagging in this area will be divested. ARTICO’s voting policy focuses on those rare situations where it would vote against management to promote its sustainability and decarbonisation agenda.

Academic evidence about the effect that ESG factors have on performance diverges, depending on the scope and period of the analysis. ARTICO’s own research about the predictive power of raw ESG scores on future outperformance was equally inconclusive.

“That’s why we developed — and apply — our own ARTICO-ESG factor,” says Herrera. ARTICO’s in-house research showed that the full integration of ESG scores as positive selection criteria during portfolio construction leads to a higher probability of superior investment performance.

There are three main reasons for that:

1. An impressive ESG score is a useful indicator of good strategic management. A few decades ago, ESG investing was a niche, and listed companies did not truly focus on sustainability. Today, boards of directors and senior management teams have sustainability as a strategic priority.
2. A high score will attract a long-term capital flow as ESG investing becomes increasingly mainstream. Companies with better scores will attract more capital.
3. ESG scores provide a prediction of investment risk. A high score minimises the risk of unpleasant surprises by reducing the exposure to environmental, social, and reputational risk.

Many ESG-focused strategies have no explicit climate objectives. ARTICO focuses on reducing its carbon footprint to align its portfolios with the climate objectives of the Paris Agreement. Typical passive investment benchmarks focus either on ESG or on Paris-alignment. ARTICO Partners intends to achieve both with a systematic approach.

ARTICO’s sustainable portfolios are the first funds enabling investors to combine excellent fundamental characteristics with very high ESG ratings (AA or AAA) and a very low carbon footprint.