Sustainable investing: When values add value

"There is evidence to indicate that companies with higher sustainability scores can and do generate better financial performance."

Alexander S. Friedman (Global Chief Investment Officer, UBS Wealth Management)

Companies are increasingly integrating environmental, social, and governance considerations into their overall business strategy. This allows investors to more easily align their investments with their values, which then provides their portfolios with more endurance over the long term.

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Since the turn of the millennium, we have witnessed imploding asset bubbles in technology and housing, a long list of governance lapses and accounting scandals, and the greatest financial crisis of our time. Meanwhile, the global economy faces threats from climate change, water scarcity, the depletion of other important natural resources, and other human-induced factors which, if not managed well, will accelerate as the world’s population grows and more people are lifted out of poverty.

In response, a consensus is emerging among investors that the unsustainable economic and industry trends of recent years cannot be allowed to continue. Put simply, the social fallout is too great. And so, one of the megatrends building across the financial landscape is focused on how investors can express their values in their financial decisions and have a positive impact on the world around them. The end goals are clear: improve risk-adjusted returns, make a positive social impact with capital allocation, and incorporate one’s values.

To pursue these goals and drive their portfolios accordingly, investors are evaluating a broader array of information and tools. There is a case to be made that synthesizing environmental, social, and governance factors together with traditional fundamental data in the investment analysis and decision-making process can yield better performance outcomes. Indeed, there is evidence to indicate that companies with higher sustainability scores can and do generate better financial performance.

Sustainability comes of age

Once a niche segment, sustainable investing has entered the mainstream. Whereas most early approaches simply excluded companies involved in certain objectionable business activities, today’s approach evaluates various criteria across a wide range of assets – stocks, bonds, commodities, and non-traditional assets. Sustainable investing strategies have seen positive inflows over the past several years, outpacing the overall growth of assets under management in Europe and North America – the regions where sustainability has had its greatest uptake.

By taking sustainability criteria into account, investors are making an impact by redirecting capital to reward certain companies while penalizing others. The good news is that a growing number of companies are adjusting to this new reality, and see sustainability as a source of competitive advantage. Company managements are beginning to understand that external shocks that damage reputation have severe knockon effects on brand equity and their subsequent ability to position and price products.

That being said, sustainable investing is still easier said than done. The business community may be taking a more holistic approach to managing risk and building value, but there is still a long path ahead before investors have full transparency on corporate sustainability efforts. At UBS, our mostly principles-driven approach to analyzing environmental, social, and governance factors recognizes the challenges inherent in measuring, reporting, and evaluating sustainability. Fortunately, common reporting and accounting standards are emerging.

A thematic approach

In addition to weaving sustainability considerations throughout a portfolio, investors may also wish to build exposure to specific investment themes that aim to address a range of environmental, social, and governance concerns. While there are many trends that could conceivably fall under a sustainable investing umbrella, UBS currently focuses on some of the more readily investible and compelling long-term themes: the food-supply chain; the obesity epidemic; renewable energy; and water management.

Growing economies and populations are increasing global demand for life’s necessities. We are confronted daily with high energy prices; rising costs of basic foodstuffs are threatening social stability; poor diets and lifestyle choices are lowering life expectancies; and the lack of clean water has enormous health implications. Our sustainability themes look into impending food, healthcare, energy, and water scarcities, and the innovative ideas to redress these deficits.

Ultimately, sustainable investing is itself a theme that will endure even as it continues to evolve, and importantly, will provide your portfolio with more endurance over the long term than traditional investment approaches.

Is creating lasting positive change one of your goals?

UBS offers a range of innovative solutions in the philanthropic field to help you achieve your aspirations. From donations via the UBS Optimus Foundation, to Values-Based Investments combining positive social and environmental impact with financial returns, to tailored support and advice on engaging in philanthropy across regions and sectors, we can help you make a positive, measurable difference. Speak to your Client Advisor to find out more, or visit www.ubs.com/philanthropy