By Dr. Dinah Koehler, Executive Director on the Global Sustainable Equities Team at UBS Asset Management More
At the 2017 World Economic Forum (WEF) we announced our intention to raise USD 5 billion in client assets over the next five years to help plug funding gaps needed to reach the 17 UN Sustainable Development Goals (SDGs). In that time, we've made huge strides and learned a lot, most importantly the indispensable role of partnerships in reaching these targets. That's why at the 2018 forum we decided to follow up the 2017 white paper1 with an update focusing specifically on the 17th SDG "Partnerships for the Goals". The paper explains how we are working with partners to create 100% sustainable impact investing solutions (see image below) to fulfil our promise to "mobilize private wealth for public good."
Minding the gaps
First of all, the world is falling well short of the annual USD 5-7 trillion target to reach the UN SDGs. We currently estimate a minimum USD 1.5 trillion shortfall per annum. And yet, there is still USD 250 trillion worth of private wealth that has been barely tapped: just one percent of this would cover these gaps. But even as the world's largest wealth manager, at UBS we soon realized that in order to create the kind of sustainable investing solutions to mobilize private wealth we needed help.
In our research, the gaps in the current sustainable investing strategy universe became evident early on, in particular, the lack of available instruments for generating positive societal impact in publicly listed equities. We decided to partner with Hermes Investment Management to define and develop a best-in class shareholder engagement strategy as empirical evidence shows that shareholder engagement leads to positive social, environmental, and financial outcomes. Of the 779 climate-related shareholder proposals in the Ceres Resolution Database filed from 2013 to 2017, 36% were withdrawn following successful agreement between investors and the company. Successful shareholder engagement on ESG factors has been shown to deliver positive cumulative excess returns of around 7.1% in the year subsequent to shareholders and management reaching agreement.2
We also realized that other financial firms could help us fill these sustainable investment instruments gaps with new investment solutions, especially sustainable fixed income solutions in US corporate debt, high yield bonds, and senior loans, as well as emerging market debt, thematic impact and real estate impact strategies. To address these gaps, we partnered with the World Bank on a pooled highly rated debt allocation, which in a 100% sustainable portfolio plays the same role as government bonds and other high-grade fixed income instruments play in a traditional portfolio.3
In addition to teaming up with the World Bank, we are working with organizations that include PwC, Linklaters, the International Finance Corporation (IFC) and Hamilton Lane to support Align174, an independent, open-architecture, impactful direct investment platform initiated by the WEF’s Young Global Leaders.
Doing good means doing well
We recognized that private clients have different passions and affinities for solving particular SDGs with their capital. They have varying appetites for different types of investment vehicles, whether traditional or sustainable. To enable private wealth to optimally fund sustainable development, we believe it is essential to abandon the widespread use of “one-size-fits-all” ESG screening or exclusion approaches. Achieving maximum impact means offering a full suite of next-generation sustainable and impact investment solutions.
Finally, we decided we needed new industry-leading benchmarks to assure investors their investments match their sustainable investing goals more closely to avoid the problem of “green washing.” Moody’s Investor Services found that 10 of the 17 green bonds it surveyed had insufficient reporting and disclosure about their green commitments. To ensure transparency, UBS is partnering with Solactive in developing new-generation fixed income benchmarks for institutional and corporate investors to define target asset allocations along three dimensions – financial return, financial risk and sustainability.
In this article I've given you a snapshot of the 30 partnerships we have formed in the last year alone. These will continue to grow as we explore and develop more sustainable and impact investment solutions that allow clients to contribute to solving the UN SDG challenges, while maximizing their risk-adjusted financial returns through products that target the SDGs of their choice. We are convinced everyone stands to benefit from this joint effort and we look forward to working with many more partners as it accelerates.