Analysts at Zuercher Kantonalbank are now looking at Swiss-listed companies through the lens of sustainability. How the financial sector is faring and why bankers' bonuses are a cause for concern.

Those responsible for investor relations at Swiss companies will soon be seeing stars now that the research department of Zuercher Kantonalbank (ZKB) has been all of the stocks listed on the broad Swiss Performance Index (SPI) a sustainability ranking.

Financial analysts, headed by Omar Brem are examining the sustainability and ESG conformity according to the criteria Environment E, Society S, and Governance G of 142 public companies currently listed in Switzerland. In doing so, they assign 0 to 5 stars as part of a ranking, supplemented with qualitative findings, according to a report from the largest state-owned bank Thursday.

Rating Influence

The new rating, published in addition to traditional stock analyses, is intended to reflect the company's ESG conformity. The analysts posit sustainability aspects have an influence on corporate development, investment risk, and medium- to long-term company valuation. They also take into account respective ESG ratings when calculating the cost of capital of the analyzed companies as well as fair value.

Companies that receive five stars from the ZKB analysts can therefore consider themselves «ESG Leaders.» Two or fewer stars means a company has some catching up to do on ESG issues. Zero stars mean that a company is not at all ESG compliant. The latter rating is automatically applied as soon as a company performs particularly poorly in one of the twelve categories examined.

Leaders are Rare

As the first edition of the «ESG Compass» shows, sustainability leaders on the SPI are rare. Only four companies earned five stars, none of them a financial services provider: fragrance manufacturer Givaudan, pharmaceutical multinational Roche, construction chemicals company Sika and telecom giant Swisscom. Some 72 companies could boast four stars, with only 17 companies receiving two stars or fewer.

ZKB notes that the financial sector, together with the healthcare sector and industry, are the best performers. In the qualitative score across the three topic areas E, S, and G, the insurance industry scores the most points, with Swiss Re standing out with clear net-zero targets for greenhouse gas emissions.

Fair Compensation

In the financial sector, the analysts say the advantages in the S and G areas are convincing, whereas the E area scores below average due to the financing activities of banks, some of which are viewed critically.

As it turns out, in the area of governance, cantonal bankers are also interested in banker bonuses. In corporate governance, fair and performance-based compensation plays an important role. «That's why we consider the relatively highest compensation of the analyzed companies in our ESG analysis,» they write. In each case, compensation is set about investor returns relative to the index or the companies' net returns.

Bonds Up Next

As expected, UBS and Credit Suisse stand out here with particularly high compensation for management and board members.

The ZKB analysts plan to expand their ESG rating even further. The research coverage will be expanded to include 29 real estate funds, twelve real estate investment foundations, and around 100 bond issuers. The bank is following a trend that can already be seen in the research departments of major foreign banks. Recently, Barclays looked at the shares of UBS, Credit Suisse, and Julius Baer through «green glasses.»