While global interest in ESG investing has been on the increase for over three decades, it has recently spread beyond its traditional domain of the equity markets to other asset classes, including fixed income. Several factors have contributed to this development, such as the increased support from policy makers, greater corporate disclosure and increased coverage by ESG data providers.
The increased availability of ESG data and ratings has enabled several important innovations in the fixed income space like green bonds and social bonds. There have also been new collaborative efforts, such as the one between UBS and the World Bank providing low risk sustainable investment alternatives to high grade fixed income investments. Subsequently, the rise of these innovative solutions has allowed investors to allocate more private capital to sustainable fixed income instruments.
However, today ‘integration’ of sustainability has become a loosely-used industry term that refers merely to the application of sustainability data or ratings into the investment process. This is simply not enough to provide a holistic view. At UBS, we strongly believe that while sustainability ratings play a crucial role in integration, to incorporate this information effectively within investment recommendations, it must be applied by the credit analysts and portfolio managers themselves.
Furthermore, it is important to understand the fundamental differences that do not allow for equity approaches to be simply replicated within fixed income, given the fixed income orientation towards managing downside default risk and the equity orientation toward upside appreciation. Addressing these challenges necessitates pursuing sustainability integration at a more fundamental level than the mere application of third party scores widely available on the market today.
At UBS, we have developed a thorough, multi-step integration process, based on an in-depth materiality analysis, a fundamental analysis to gauge the impact of ESG on credit worthiness, and cross-sectoral macro trend analysis. Together, these assessments provide the foundation of our approach to ESG integration – an approach that is materially focused, forward looking and concentrated on the implications of sustainability for credit risks.
We are deeply committed to moving sustainability beyond a niche investing activity. By addressing the challenges of systematically integrating ESG factors across our fixed income platform we are moving a step closer to our ambition of broad SI integration across all our asset classes.