SI integration across asset management portfolios
Cumulatively, all these developments have led to a significant global shift of assets into sustainable investments. Yet, while sustainable investing has catapulted into center stage globally, it is a relatively recent trend. UBS has a strong legacy of investing sustainably for over 20 years. As far back as 1992, UBS was amongst the earliest signatories of the UNEP bank declaration (UNEP FI), going on to become a member of the Association for Environmental Management and Sustainability in Financial Institutions in 1996. The UBS strategy for sustainability was launched in 1997, prophesizing the shift in global consciousness. Today, the financial markets are one of the most powerful transmission mechanisms by which corporate sustainability can be promoted globally, thereby impacting society in a positive way.
Putting that conviction into practice, UBS has already made a clear commitment to integrating ESG considerations into core investment processes across the firm, with the aim of having full SI integration across equity and fixed income research platforms by the end of 2018. This will enable all 900+ investment staff to take SI factors into consideration, making UBS the first large-scale asset manager to implement broad integration of SI across the traditional asset classes. This outlook has resulted in UBS becoming the largest provider of SI equities and fixed income ETFs in Europe.
Developing an investment strategy
At UBS, developing a sophisticated sustainable investment strategy has been a detailed process involving several key factors, to ensure high impact on the ground without compromising on fiduciary responsibilities. The approach rests on two key pillars: the integration of ESG factors in the investment research process and an active engagement policy.
Integrating SI capabilities across asset classes relies on a process of close collaboration. A dedicated SI research team works with the equity and fixed income analysts, helping them identify material ESG factors by looking deeper at which particular aspects of an issue are relevant for a specific sector. For instance, human capital can be looked at from the perspective of working rights and conditions, occupational health & safety, and culture. The importance of these different topics varies in terms of their effect on creditworthiness depending on the activities in a sector. Working rights and conditions may be more important to productivity in a manufacturing sector; occupational health & safety may be important to operational effectiveness in oil & gas production, whereas culture may be more relevant to ethical sales in an insurance company or a bank. Such analysis is then captured both in an overall score and a direction, which is then applied within the overall equity or credit analysis.
We firmly believe that one of the key drivers to moving more assets into sustainable strategies is the integration of sustainability in fundamental research, impacting all actively managed strategies. This is why it is essential that the analysts sit at the heart of the investment process.
UBS are firmly of the view that it is mainstream analysts who are best placed to make use of existing knowledge and experience to provide the context in which to consider sustainability issues. Analysts aggregate both quantitative and qualitative data, consider its relevance and materiality, put it into an appropriate recommendation framework, and then also make judgements based on sometimes incomplete and imperfect information. Analyzing ESG issues requires the same skills, albeit from a different starting point, a different set of conditions and with divergent conclusions. It is these forward- looking judgements which distinguish the work of the analyst from pure ESG data gathering or scoring.
In tandem with this mainstreaming of ESG factors within research is the adoption of a policy of active engagement: exercising shareholder rights by proxy voting and corporate engagement, and proactively reaching out to companies to discuss material ESG issues. UBS has a dedicated stewardship team that works closely with SI analysts and investment teams to understand company strategies and performance on sustainability issues, and select cases for engagement. In opening channels of conversation with companies, it is possible to engage in constructive dialogue, developing and executing 1–3 year engagement programs tailored to specific companies. By actively participating in voting, it is possible to influence strategic outcomes, ensuring greater impact and better-informed investment decisions. It is this dual force of integration and engagement that ultimately affects impact.
There is, of course, an additional aspect to the concept of impact and that is measurement – how can the impact of an investment on society and the environment be measured? To address this, UBS has set up research partnerships with leading universities to develop a proprietary set of impact measurement metrics. The ESG assessment methodology at UBS has also evolved over time to reflect the goals of the SDGs and assess the impact which companies, through their supply chains, direct operations and services and products offered, are making towards those goals.
An account of the investment approach would not be complete without considering the roles of more conventional, data-driven approaches, such as screening. Simply screening out companies that do not meet environmental, social or ethical criteria has been perceived as problematic, as critics believe this could conflict with the fiduciary responsibility of asset managers. Hence the preferred approach of UBS places an emphasis on positive screening, a process that focuses on investments with strong ESG characteristics in combination with attractive financial fundamentals. Positive screening allows investors to establish a systematic approach towards identifying companies that demonstrate high quality management, and the ability to mitigate various sustainability risks.