Long-term value creation

Sustainable investing for institutional investors

24 Oct 2017

Sustainable Value

In the last few years, we have seen interest in sustainable investing grow rapidly, with sustainable assets under management doubling between 2012 and 2016. Though it is yet to become a truly mainstream investment strategy, larger global asset managers have had to develop new solutions to meet the sustainable investing needs of their clients. Hence, there is a need to truly understand the nature and goals of sustainable investing, and the ways in which mainstream investors can approach it to best meet their clients’ needs.

Unfortunately, sustainable investing has long been burdened by misconceptions, such as being a strategy that limited choice, or one that compromised fiscal objectives. Though the entry of ESG norms was a step forward, it was far from enough. Sustainable investing through ESG screening was a wholly isolated and inadequate approach for larger investors.

ESG norms were originally used only on risk management metrics while a progressive development, they did not provide a holistic approach, as they did not account for the positive external impacts of companies' products and services.

Moreover, ESG screening remained a step independent of financial analysis and thus distinct from the traditional investment process. Historically, providers of ESG information generated data for screening, but did not alter the approach to financial analysis by incorporating sustainability factors into investment models and recommendations.

Academic research shows a positive correlation between corporate environmental responsibility and long-term stock performance. There is much research suggesting that the integration of ESG information does not harm returns and may mitigate the downside risks. It is clear that sustainable investing is not about screening away opportunities and limiting choices; on the contrary, it is about finding new opportunities by identifying long-term sustainability trends and accounting for longer-term risks.

Key sustainability issues, such as climate change, impact company performance and risk over a longer-term time frame. Strategies which explicitly integrate these issues are particularly appropriate for larger investors, given their long-term investment horizon. Sustainable investing is thus more aligned to the goals and requirements of larger investors, presenting new possibilities and remaining consistent with their longer-term fiduciary obligations.

Furthermore, this is a unique opening for clients and their asset managers to establish a dialogue around the clients' specific needs. This helps build relationships of openness and trust, and provides an important opportunity for collaborative innovation.

There are many ways for larger investors to successfully approach sustainable investing. We at UBS strongly believe that this is a compelling opportunity to transform sustainable investment, from a form of normative investing driven by screening, to a more fundamental means of driving long-term value creation for larger-scale clients.

Canada Asset Management

Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report was compiled, and any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Commentary is provided at a macro level and is not with reference to any investment strategy, product or fund offered by UBS Asset Management and is provided in Canada generally pursuant to the registration exemption provided for in Section 8.25(2) of National Instrument 31-103 and in Ontario pursuant to Section 34 of the Securities Act (Ontario) and does not purport to be tailored to the needs of the person or company receiving the advice.. The information contained in the materials should not be considered a recommendation to purchase or sell any particular security. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. UBS Asset Management services offered to Canadian persons are provided by UBS Asset Management (Canada) Inc., a Nova Scotia corporation. UBS Asset Management (Canada) Inc. is an indirect wholly-owned subsidiary of UBS AG and is registered as a portfolio manager and exempt market dealer (in all provinces of Canada), commodity trading manager (Ontario), adviser – commodity futures (Manitoba) and investment fund manager (Ontario, Quebec and Newfoundland), all pursuant to Canadian securities law. Materials may include forward-looking statements. Actual future results, however, may prove to be different from expectations. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.

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