By Michael Baldinger, Head of Sustainable and Impact Investing at UBS Asset Management
No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.
- Isaac Asimov
Of all the reasons investors might want to develop a sustainable portfolio, the one most often overlooked, but in my opinion the most compelling, is that it makes for a well-balanced investment strategy. Incorporating sustainability metrics is no longer just a nice-to-have, or something to help you sleep at night. It's sound investment sense.
Incorporating sustainability metrics is no longer just a nice-to-have
Sustainable investing is one of the fastest growing segments in finance, with assets under management increasing by 61% from 2012 to 2014 to USD 21.4 trn, according to the Global Sustainable Investment Alliance. No matter who you work for in the investment industry - I recently joined UBS Asset Management as head of sustainable and impact investing from a prior role as CEO of RobecoSAM - senior executives can no longer ignore clients' interest in sustainability factors or their effect on performance.
All sustainability factors must be integrated when researching investment assets to get a full picture of their risks and benefits. Does a company understand what the risks are in a supply chain, or with respect to climate change, and how to manage them? I could never imagine investing my own money without understanding what the risks and future revenue drivers of a company are. Nowadays that must include environmental, social and governance, or ESG, criteria. An analysis without answering these questions is not complete.
All sustainability factors must be integrated when researching investment assets to get a full picture of their risks and benefits
Making accurate and reliable investment decisions based on sustainability criteria has improved dramatically in recent years. This is largely thanks to greater disclosure of sustainable investing factors in company reporting, as reporting requirements evolve, and companies themselves recognize the value placed by investors on transparency of ESG issues.
The team at UBS Quantitative Research has examined a number of recent studies to determine whether ESG investment bias in portfolios produces better returns. They found that while it is sometimes statistically insignificant, investment strategies that screen for ESG criteria on average outperform those that do not.
Making accurate and reliable investment decisions based on sustainability criteria has improved dramatically
Sustainable investing will also be a major driver for innovation in finance. For instance, by measuring the exact environmental and social impact of holdings in which we and our clients invest, we can create transparency in our clients' portfolios and optimize them according to their impact preferences, with pretty much the same projected risks and returns. This is a real game changer and empowers our clients to act on their sustainability interests.
Overall, ESG integration is a natural progression in the investment research process. It not only gives us a better understanding of the inner workings of a company or an industry and how environmental or other sustainability factors may impact it. It is also about doing better research that incorporates long-term extra financial factors that allows professional investors to make better informed decisions for their clients.
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