Demonstrating positive impact for mainstream investment strategies

By Christopher Greenwald, Head of Research Sustainable and Impact Investing, UBS Asset Management

The United Nations Sustainable Development Goals (UN SDGs), launched in 2015, have played a huge role in focusing and mobilizing action and cooperation across businesses, NGOs and governments on ESG topics. This is reflected in the agenda of this year's UN PRI (Principles of Responsible Investing) conference, not least the SDGs' relevance to investors.

What do investors think of the UN Sustainable Development Goals (UN SDGs)?

Both institutional and retail investors increasingly desire that their investment strategies have a positive social and environmental impact. This is driving our efforts to mainstream impact investing through more liquid strategies such as fixed income and publicly listed equities.
Traditionally, impact investing has been concentrated in illiquid asset classes such as private equity and private debt. As we've highlighted in previous research papers, moves to mainstream impact investing strategies into more liquid assets have been controversial, mainly because key impact investing criteria "intent", "measurement", "verification" and "additional" are difficult to prove1. In this blog, I share a few examples where we are developing new approaches that can overcome these traditional obstacles, and provide clients with liquid impact investing strategies.

Adding a third dimension to investing

If you can't measure it, you can't change it

Until recently, corporate disclosure on sustainability has been confined to internal performance metrics, such as a company's own carbon footprint or human capital performance factors. Increasingly, the goal is to measure the wider impacts of a company's products and services on society and the environment.
At UBS, our Asset Management division has teamed up with a large institutional investor, along with two leading universities to develop a science-based approach to measure impact. This project aims to develop a set of systematic metrics to measure corporate environmental and social impact across a portfolio of public equities for the first time.

Value-added investments

Another key requirement of impact investing concerns proving that the impact of the investment decision, is "additional" (i.e. wouldn't have otherwise occurred). Unlike private equity or project financing, it is much harder to determine the additional impact of investments in public equity as the ownership stake is small and not directly linked to a company's financing.

One approach to counter this is to develop strategic engagement arrangements with companies around sustainability. For example, we can reach out to companies in our impact strategy to achieve two outcomes: i) to minimize ESG risks (negative impact); and ii) to maximize positive impact. We encourage companies to improve disclosure on the impact of their products in order to shape a corporate strategy that would maximize impact in alignment with relevant SDGs. By designing a strategic engagement strategy aligned with the investment goals, we can demonstrate impact and thereby the additionality of the investment in public equities.

Annual engagement cycle
 

Through such collaborations with institutional clients, it is possible to develop scalable and mainstream applications for impact for liquid investments. Such developments are important, in order to expand the scope of the UN SDGs and impact investing to a wider set of clients. At the same time, it can help to plug the estimated funding gap of USD 5-7 trillion needed annually to fulfil the UN SDGs' ambitious targets by 2030.

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Why it matters

SDGs addressed:

In September 2015, the United Nations set out a plan for transforming our world by 2030. The 17 Sustainable Development Goals (SDGs) are aimed at addressing the most pressing social and environmental challenges of our time. And we've committed to taking part in making them a reality.

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