How to invest sustainably in a post-pandemic world

Our latest monthly UBS Sustainable Investing Perspectives edition explores the investment implications of Europe’s green recovery, the growth of sustainable investments, and diversity.

01 Jul 2020

Perspective 1

Europe's sustainable after COVID-19 recovery plan

The European Commission’s recent post-pandemic recovery plan proposes to raise EUR 750bn to support EU government recovery plans for countries making progress toward their Green Deal goals, provide solvency for green and digital transition technologies, and invest in health infrastructure.1 While the specifics of the proposal still need to be discussed and voted on by the EU-27, Reuters has reported that there is consensus on taking a green approach to recovery.2

Europe’s approach is consistent with developments in some other markets. As reported by Bloomberg, the Chinese government has pledged CNY 10bn to build electric vehicle infrastructure.3 South Korea’s “Korean New Deal” includes KRW 7 trillion to support the development of renewable energy infrastructure and SMEs with sustainable business models.4 A notable exception is the US, where a recent Executive Order exempts new infrastructure development from required environmental assessments, thus bringing more competition for investment to US sustainable industries.5

Sustainable investing takeaways for investors

  • Overall, we expect these policy trends to generate strong growth momentum for sustainable industries and CIO’s long-term investment themes such as clean air and carbon reduction, energy efficiency, renewables, and water scarcity.
  • Investors can access these sustainable themes through both active and passively managed funds. However, focusing on single themes and industries can introduce tilts to certain sectors.
  • We recommend diversifying across multiple themes, or introducing thematic exposure to a fully diversified portfolio.
  • Focusing on longer-term investment themes also helps to cut through the short-term noise in the market while we are still in a period of pandemic and economic uncertainty.
  • Bond investors could look at bonds issued to support Europe’s sustainable recovery and investment in healthcare, workers, and the green transition.

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Perspective 2

Engagement and private investors are driving sustainable investment growth

New data published this month by Swiss Sustainable Finance (SSF) shows that assets managed under an SI approach increased 62% in 2019 to CHF 1,163bn. FNG, a German sustainable investment forum, noted similar trends in Germany (23%) and Austria (38%). Private investment was a strong growth driver, rising 185% to represent 21% of all SI AUM in Switzerland. Given Morningstar data showing growth inflows into SI funds globally through Q1, we expect this asset growth trend to continue into 2020 across different markets.

Voting and engagement ESG strategies showed some of the strongest asset growth in the German-speaking markets, and we see evidence that these asset owners are actively practicing what they preach in different geographies. Morningstar data on the US 2020 proxy voting season indicates that the number of adopted social and environmental (E&S) resolutions hit a new record.6 E&S proposals accounted for two-thirds of all submitted ESG resolutions, representing another record high based on a Proxy Preview report. Climate change was the main environmental topic this season, followed by resolutions on political activity and fair pay and equitable working conditions as the two key social issues put forward by investors.7 The total number of E&S resolutions going to a vote has seen a steady decline over time, indicating that more companies are making changes that satisfy shareholders in advance of the votes.

Sustainable investing takeaways for investors

  • We believe that ESG engagement-focused strategies are the most effective mechanism for investors in public markets to drive change. Investors should look for managers who embed the opportunity for engagement into the investment case and regular portfolio management, targeting benefits to both sustainability and corporate performance.
  • ESG engagement-focused strategies tend to have exposure to smaller market cap and slightly lower quality equity and bonds than other SI approaches. They are also the most impactful way of investing in public markets.
  • As we move into the recovery phase of the COVID-19 pandemic and economies reopen, we expect select cyclical and value stocks to recover some of the ground lost during the sell-off, particular in our upside scenario. ESG engagement equity funds are one way of capturing the upside of this rotation.
  • Similarly, in a low yield credit environment, actively managed ESG engagement high-yield bonds strategies can help improve portfolio return expectations.

Growth of sustainable investing approaches

Source: SSF, UBS

Perspective 3

Should diversity matter to investors?

The US Supreme Court ruled in June that dismissing employees because of their sexual orientation and gender identity breaks the 1964 Civil Rights Act, which forbids employers from discriminating against employees on the basis of personal characteristics. Effectively, this affords greater workplace protections to LGBTQ people employed throughout the US and means that US-based companies with a corporate culture that does not support diversity of all kinds are at increased risk of legal and financial penalties.

From a global perspective, there is an abundance of evidence that more diverse teams generally tend to perform better than homogenous teams, making diversity a material issues for all companies. Yet diversity of all forms is lagging in large corporations. New research published this month found that FTSE100 boards have fewer than 10% of members from a black, Asian or ethnic minority (BAME) background.8 From an economic perspective, CIO’s chief economist believes that when part of the population is systematically excluded from employment and economic activities, there can be a significant negative impact on productivity and the national economy as a whole.

For investors, diversity indicators can be a useful proxy for identifying well-managed companies, whether this is part of a broader approach to selecting ESG Leaders, or as a standalone investment theme. Single themes focusing on diversity typically seek to invest in companies that benefit either SDG4 (gender equality) or SDG11 (reducing inequalities), which focuses on reducing income inequalities within and between countries, as well as empowering and promoting the social, economic and political inclusion of all.

Sustainable investing takeaways for investors

  • Investment solutions in public markets addressing inequality have, to date, focused primarily on gender equality, largely driven by data availability. In fact, AUM in such strategies has steadily increased over the past few years, and investors interested in the topic can access the CIO theme on gender diversity.
  • Impact strategies in private markets often focus on improving access to core services for low income and underserved populations. Strategies that focus on equality, social justice, local community investment, or racial and ethnic diversity are beginning to emerge across asset classes.
  • Some asset managers are already beginning to engage with companies and data providers to push the diversity focus beyond gender, while the rest of the industry has space to continue to develop. Looking for managers that are actively considering these questions can enable investors to drive capital towards companies that benefit from more diverse workforces while helping to promote a more equal and sustainable society.

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