Demonstrating positive impact for mainstream investment strategies

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.

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.

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.

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.

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.

¹Doing well by doing good, May 2016; Mobilizing private wealth for public good, January 2017: https://www.ubs.com/global/en/wealth-management/chief-investment-office.html
 

ESG disclosure:

Sustainable investing strategies aim to incorporate environmental, social and governance (ESG) considerations into investment process and portfolio construction. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. The returns on portfolios consisting primarily of sustainable investments may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered, and the investment opportunities available to such portfolios may also differ.