Sustainable investing (SI) is about broadening the use of material, non-financial data in the investment analysis process to include ESG – or environmental, social and governance – metrics. By adding these metrics to the investment process, investors can get a broader view of the potential upside and downside of their investments. With that, they can make better informed investment decisions. It provides a new kind of transparency into our investments – achieved through a new set of metrics that give investors material, often quantitative, data into how well a business is run, where its real risks lie, and how sustainable its business model and practices really are. If fully embedded in the investment decision-making process.
SI has become an imperative for investors
With global sustainable investments having reached over 22 trillion US dollars in 2016, up from 13 trillion in 2012, there is little doubt that sustainable investing (SI) is becoming a mainstream investment approach.
This growth has led to increasing pressure on institutional investors to invest sustainably, what we might call the sustainability imperative.
This pressure is coming from a number of different stakeholders.
In a recent survey three-quarters of asset owners said management of environmental, social and governance issues (the so-called ESG factors that are at the heart of much sustainable investing) are one of their top five criteria when choosing an asset manager.
Some 85% review their manager’s responsible investing policies, while more than 80% want to better understand and improve the positive impact their investments can have on society.
Growing numbers of institutional investors have a fiduciary duty to SI too: more than 65% have contractually committed to report to their stakeholders on social/environment performance. Regulators around the world are also increasingly requiring pension funds and other institutional investors to consider and report on their sustainable investing activities, adding a compliance element to the mix.
Perhaps most importantly, institutional investors face a continuing struggle to meet their performance targets in today’s low-return environment. There is strong evidence that sustainable investing approaches can lower overall portfolio risk while supporting sustainable returns. This makes for a compelling investment case for SI too.
New skills and a new set of eyes
As one of the first global banks to be actively involved in SI, we at UBS are well acquainted with these approaches - and convinced of their merits.
Today we have one of the premiere global SI offerings covering all its different aspects, from research and assistance with corporate engagement to a wide range of innovative products and services to supporting our clients as they tailor their own SI solutions.
SI approaches are not meant to replace standard financial analysis, but to add a new layer of pertinent information to it. For institutional investors, taking advantage of SI means learning a new set of analytical skills which involves learning to see the world with a new set of eyes.
We understand what this means: At UBS Asset Management we have a long history of developing proprietary methodologies that incorporate sustainability factors into fundamental research, analysis and investment decision-making. Among other things, we have created an objective, proprietary ESG score which is transparent, comparable, and reflects our proprietary assessment of each company’s sustainability profile. Today we are working with academics to develop quantitative methods to measure the impact of investments, which is one of the new frontiers of SI.
There is little doubt that sustainable investing is coming to the forefront. At the same time, these are early days and there is much left to learn. For institutional investors facing the sustainability imperative, there is also much to be gained.