Our approach to stewardship

We believe that managing both active and passive strategies creates synergies which we can bring to our stewardship approach. On the one hand active strategies can benefit from the increased exposure to companies generated by passive strategies which can lead to stronger corporate access and a greater ability to influence management. On the other, the in-depth knowledge of expert financial analysts with sector expertise, and their relationships with corporate management, can benefit passive strategies.

Our ESG integration process focuses on taking better account of material risks which could enhance investment returns and/or impact downside risks. Put simply, ESG integration involves a more holistic accounting of sustainability factors in the research process both for our listed equity and fixed income analysts. We believe this leads to better informed investment decisions which could, in turn, reduce risks and enhance performance.

Engagement as a core part of the investment process, relying on:

The assessment of ESG issues is oriented around the ESG Material Issues framework developed by our Sustainable Investment (SI) research analyst team. Sustainability covers a wide range of topics, so financial analysts and portfolio managers need to focus their attention on a set of key factors that could affect a company's financial performance. Our materiality framework identifies the three to five most financially relevant factors per sector that can impact the investment thesis and credit recommendation across 32 different industry sectors. This helps analysts focus on those sustainability factors most likely to influence investment returns.

Identify

To facilitate the integration of sustainability factors through the assessment of material ESG risks, UBS-AM has developed a proprietary "ESG risk dashboard” for both corporate listed equity and fixed income holdings which serves as the starting point for ESG integration. It allows equity and credit analysts to quickly identify companies with significant ESG risks via the "UBS ESG Risk Signal". It provides investment teams with a structured, holistic view of ESG risks across four different dimensions, allowing for industry relative comparisons (expressed via the UBS Blended ESG Score) as well as the identification of outliers. If one or more pillars fail thresholds set, the issuer is flagged for severe ESG risks by the signal. Those companies will need more work to assess the material impact of the highlighted risks.

Review

The ESG Risk Signal is incorporated into fundamental equity and credit analysts' standardized ESG templates. They conduct an ESG risk assessment as part of their investment case for their companies under coverage. They indicate whether they agree with the results, provide a rationale for their conclusions and assess the overall direction of the company's ESG performance.

Decide

For companies where an ESG risk has been identified, but where the analyst does not believe that the risk signal flag is current, appropriate or material, an additional analysis may be conducted by the SI Research Analysts which then serves as the final reference point for the portfolio manager’s investment decision making.

In this way, ESG integration creates a situation in which equity and credit analysts, SI analysts and portfolio managers discuss the implications for investment research, potential engagements and outcomes at the portfolio level. This combination ensures that portfolio managers are fully aware of any material sustainability risks that could have a negative impact on portfolio performance. This understanding allows portfolio managers to make informed decisions where their investment convictions are expressed through instrument selection and weightings and embedded in the construction of the portfolio. Within this framework, a portfolio manager may choose to invest in a company with high ESG risks where this is seen to be adequately compensated by the expected investment return. Alternatively, the portfolio manager may choose to reduce their exposure to the risks.

Mitigate (through Engagement and Voting)

If, having assessed the ESG risks, engagement is identified as a next step, dialogue with the investee company will be initiated. The sharing of ESG information and investment research in a centralized manner via our internal platforms, ensures there's a consistent and aligned voice from the firm. Our engagement insights are used to inform our voting decision making and help reiterate feedback we provide to investee companies as well as acknowledge improvements.

For our engagements, we set specific expectations and track progress 

These are engagements that are focused on specific themes considered material, analyzed by available internal and external research and aligned with the overall sustainability and sustainable investment strategy of the firm. Ongoing thematic engagements in 2020 focused on:

Climate change

The engagement focuses on an original list of 49 companies in the oil and gas and utilities sectors. They have been selected based on our Climate Aware methodology, which measures the ability of companies to transition to a low-carbon economy.

Gender

The focus is on companies showing some good practice but which also display areas for improvement.

Impact

Our equity impact strategy has an explicit goal: to create positive environmental and social impact while generating competitive financial returns that connect to and support the UN SDGs.

Controversies

A subset of our engagement cases focus on companies that are involved in serious breaches of international standards. The United Nations Global Compact Principles are accepted as the general reference framework for defining cases of concern.

It is important that proxy voting is linked to our research and investment process. If holdings are included in more than one portfolio then we aim, as far as possible, to vote consistently to send one strong, unified message to our investee companies.

Our voting process is managed by our SI Research and Stewardship team. They work closely with our fundamental investment teams to decide how to exercise our voting rights, based on our voting principles, any engagement we may have undertaken, and our knowledge of the investee company. We do not outsource our voting decisions and retain full oversight and discretion when determining how to vote on behalf of our clients and funds.

The principles outlined in our Global Proxy Voting policy provide the foundation for our voting decisions. We will always seek to review and evaluate as much information as possible, including insights gained through our research and engagement process and information obtained through third-party research. This ensures our decisions are in the best financial interests of our clients and that we avoid ‘box-ticking’ when it comes to voting. In cases where we plan to deviate from our initial policy view, our Stewardship Committee will review the reason and consider the case for and against changing the initial commendation. A majority of committee members must approve the intended vote and reasons for the final decisions are recorded, tracked and used to inform our future policy reviews. This additional oversight strengthens our decision-making process and ensures that votes remain aligned to our principles, with a consistency in our approach. 

Voting positions for all strategies where we are entitled to vote are monitored daily by our Stewardship team via the ISS Proxy Exchange electronic voting platform. This provides us with a comprehensive overview of the total number of shares we are eligible to vote upon for all shareholder meetings.

Our voting instructions are submitted and processed via the ISS platform, allowing us to track the progress of the voting rights through to the relevant custodian bank or other intermediary who is responsible for the final submission of the vote to the issuing company.

While the primary focus is financial objectives, we believe there is a direct link between responsible property investing and long- term returns. An increasing body of evidence suggests that 'greener' buildings (in terms of both environmental and social impacts) perform better than less 'green' buildings across indexes ranging from void periods, tenant retention and rental levels.

Our Real Estate and Private Markets' (REPM) responsible investment strategy has been developed by the REPM Sustainability Workgroup. It comprises professionals from multiple countries and disciplines, ranging from engineering and construction, through to investment and business management. It sets strategies and objectives at a global level and ensures our sustainability objectives are appropriately integrated into REPM's investment strategies and property operations, in accordance with regional requirements. The responsible investment strategy is implemented by all operational functions during the entire ownership cycle of an underlying project.

For individual properties, sustainability performance is measured against recognized external benchmarks, such as the GRESB key performance indicators and third-party certifications (LEED, ENERGY STAR, BREEAM, MINERGIE®). Infrastructure also utilizes the GRESB Infrastructure key performance indicators and benchmark reports for individual investee companies.

When our alternative assets teams invest in listed real estate companies, our Proxy Voting policy applies and we regularly exercise our shareholders' voting rights. If the financial analyst- or SI analyst-led engagements focus on real estate companies, we may also share information and coordinate our efforts in the dialogue with corporate management.

The Multi-Manager Real Estate (MM-RE) team conducts engagements directly with underlying fund managers on ESG issues. Engagements may be routine in nature or based around specific transactional or recurring circumstances, such as the release of GRESB results.

Effective monitoring and engagement are essential components of the fiduciary duty on behalf of clients, and for this reason the team does not outsource any of the engagement activity. These engagements can take various forms, including written communication, conference calls, face-to-face meetings, investor meetings, AGMs etc.

ESG is also a factor in MM-RE quarterly risk assessments, a qualitative and quantitative risk assessment which uses GRESB data together with other internal measurements to rank each underlying investment for its ESG risk.

MM-RE believes ESG engagement is crucial in order to limit the risk of regulatory non-compliance, maintain properties' competitive position in the market, increase the appeal of
a property to tenants and purchasers, and in some cases, reduce expenses and improve returns. To date however, ESG risk alone has not caused an investment to be halted or a sell to take place within MM-RE.

So far, we have seen that the results of this focus and engagement have been positive, with our flagship product, GREFS, consistently achieving higher GRESB scores than the benchmark since 2014. In 2015, we were invested in one 5 star rated fund in Europe. Today, we are invested in ten 5 star rated funds.