A record amount of assets is moving to SI strategies as interest continues to expand. In fact, in 2022 global asset flows in sustainable investing funds outperformed flows in broadly diversified funds according to data from Morningstar.
Demographic trends, consumer sentiment and fiscal support serve as tailwinds, and the SI solutions set now spans across nearly all asset classes and investment styles. Whether you want to focus capital on a particular sustainability goal or simply position your portfolio for opportunities, we have resources to help.
What is sustainable investing?
Sustainable investing is not an investment product or an asset class. It’s an investment approach which can be applied across asset classes. Sustainable investing strategies aim to achieve market or better returns while contributing to environmental and/or social outcomes, helping to identify future investment opportunities.
The long-term performance of sustainable investments remains strong. We think companies that manage their business, stakeholders, and environmental impact sustainably are in a position to deliver sustainable financial results. The Chief Investment Office believes that a diversified SI portfolio will have a similar risk/return profile over a full investment cycle – noting that SI is the fastest growing segment in the global asset management industry, with SI assets having grown tenfold in the last three years.
Sustainable investing is about more than protecting the environment
Sustainable investing is an investment philosophy. It offers the potential to create better sustainability outcomes, and unlike philanthropy, sustainable investing strategies seek to achieve competitive financial returns. We see investment opportunities tied to SI for all investors, not just those focused on driving social or environmental good. This investment approach is about companies – across all sectors and geographies – which are best positioned to take advantage of longer-term structural changes, and to adapt to market headwinds.
And for clients with a UBS Wealth Way* strategy, SI need not be limited to the Legacy strategy. Based on client preferences, it can be integrated across the Liquidity, Longevity, and Legacy strategies to align client objectives for their lifetime and beyond.
There is no such thing as a “sustainable” company
This investment approach aims to systematically evaluate how companies manage their workforce in a rapidly shifting labor and demographic environment; how companies manage their energy consumption given high volatility in energy; whether they have transparent, independent board structures which minimize risks to investors; or if their revenue mix is positioned for structural changes in our economy.
All companies can be evaluated through this lens. Whether one fits in a specific SI portfolio depends on the investment and sustainability objective of the investor. For example, an investor who wants to identify those companies who are likely to benefit the most from consumer and regulatory focus on the energy transition might include a few utility and fossil fuel companies in their portfolio, as long as those names are gradually shifting their energy mix. Or they may invest in major auto companies if they’re diversifying their revenue mix by introducing electric vehicles.
Your investment objective drives how you can invest
- Identify investment opportunities and promote sustainable behavior
Invest in companies demonstrating leadership in how they manage their operations or helping to finance the transition to a more sustainable world eg companies with robust people management policies, or which manufacture batteries and other components tied to electrification.
- Make a lasting impact
Seek to generate longer-term competitive financial returns while making measurable and verifiable positive environmental and social impacts eg invest in private equity strategies which identify companies innovating for a theme like the circular economy.
- Personalize your investment portfolio
Build a portfolio that is tailored to your investment and sustainability preferences, such as climate change or diversity, equity and inclusion. Alternatively, build a portfolio which is focused on downside risk mitigation, or one to take advantage of longer-term investment trends.
How to implement—Two approaches to incorporate sustainable investments in client portfolios
- Sustainability-focused strategies:
These strategies have a sustainability objective, and also aim to generate comparable financial return to a “traditional” benchmark. These can be added as a core-allocation replacement or as a specific sleeve. Examples include equity or fixed income strategies that look for best-in-class companies on ESG topics, or strategies that identify companies with products and services aligned to sustainable themes.
- Impact investing strategies:
Invest with the intent to generate measurable environmental and social impact alongside a financial return. These look like actively managed equity and HY strategies where engagement is a component of the strategy, or often like private market investments that can replace or complement a client’s private equity or venture capital allocation.
See the CIO SI Framework for additional information.
The UBS investment view
The long-term performance of sustainable investments remains strong on both an absolute basis and a relative basis despite an underperformance last year. CIO prefers companies with credible decarbonization targets, those making active progress on diversification into lower-carbon energy sources, and those seeing meaningful improvements on social issues. In fixed income, CIO likes bonds where the use of proceeds is earmarked for environmental, social or sustainability objectives. In private markets, CIO recommends strategies which have an explicit commitment to measuring and managing positive impact.
To learn more about sustainable investing and how it can help you pursue what matters most, contact your UBS Financial Advisor or visit ubs.com/sustainableinvesting.
Main contributors: Amantia Muhedini, Joe Melvin
* Liquidity. Longevity. Legacy. disclaimer: Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.