How investors are incorporating sustainability into their investment framework: challenges and lessons

How should investors act?

Massimiliano Castelli, Head of Strategy, Sovereign Institutions UBS introducing the second panel of the event noted that 2020 was an important test for sustainable strategies. And the test was successfully passed:  sustainable indexes outperformed traditional ones and showed more resilience during periods of high volatility. As a result, the demand for sustainable strategies among investors has increased substantially. Yet many investors still face the challenge of how to implement these strategies in an efficient and effective way. Central banks and other sovereign institutions can play an important role in accelerating this trend. But with an evolving political and regulatory framework – i.e., the EU taxonomy on green investing – and increased availability of products in this space, the main challenge for investors is how to implement these strategies in an effective way. The most common questions asked by investors are: How can we invest in sustainable strategies?  Will I have to sacrifice returns? Which benchmarks should I use? Should I go active or passive? Which climate change scenario should I adopt? How do I engage with companies?

In the related second panel discussion “How investors are incorporating sustainability into their investment framework: Challenges and Lessons” which you can watch in full in our video library, Pierre Cardon, Senior  Strategist, Asset Management, BIS outlined how Green bonds can be an important tool for greening reserves of central banks. He presented the results of a BIS survey indicating that the majority of central believe sustainability should be added as a fourth reserve management objective in addition to liquidity, safety and return. The BIS has recently been active in supporting these efforts by launching its second green bond fund, a cooperative initiative to foster awareness, promote green finance and engage with issuers to support the adoption of best market practices to deepen the green bond market.

Diandra Soobiah, Head of Responsible Investment, National Employment Saving Trust, London, outlined the strategy of her institution developed in partnership with UBS Asset Management to align the whole of  Nest’s investment portfolio to the goal of limiting global warming to 1.5°C and net zero CO2 emissions by 2050 by setting specific and relevant targets in the areas of asset allocation, manager selection, stewardship and public policy. Key measures include investments in Climate Aware Strategies that weight companies according to their progress in key climate-related metrics, green technology usage or reporting as well as engagement with companies to help them adapt, and ultimately climate aware voting. The question of active engagement was considered of paramount importance to accelerate the reduction in carbon emissions required to comply with the 1.5°C scenario.