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.

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