In pursuit of sustainable returns

With a focus on finding companies that use strong management to minimize ESG risk, Max Anderl and his team highlight the companies that are driving impact and those that aren't

01 abr 2020

One of UBS-AM's largest strategies employing a rigorous process of risk assessment, analysis and engagement is the Global Equity Concentrated Alpha Strategy.

Integral to this strategy, is a three-circle assessment which combines fundamental, quantitative and qualitative and information sources. This is done with aim to limit the downside through risk assessment and drive upside opportunities through engagement.

The Concentrated Alpha team, which manages a range of global and European strategies, provides an assessment of the ESG profiles of the companies they invest in. This is conducted formally every month as well as on an ad-hoc basis.

For any company that may be flagged for elevated ESG risks, the team will obtain a more in-depth analysis from the Sustainable Investment research team, which includes a discussion of the appropriate actions for the team to take. The dialogue considers whether the sustainability risks that have emerged justify finding alternatives in the portfolio or whether there might be potential in the company addressing the sustainability risks identified.

Case study 1

	Company description		Software company operating in health care sector
	Trigger		Hold and drive impact The company flagged as high risk due to a low ESG risk score.
	Review		The Sustainable Investing "SI" research team reviewed the company and noted that the low ESG rating was mainly due to a lack of disclosure on material ESG information. They also acknowledged that there were areas for improvement in corporate governance, including remuneration and board composition, specifically on gender diversity. We engaged with the company over a call, during which they revealed that improvements were being made to its governance arrangements, as well as enhancements in disclosures, despite them having been listed for only a few years. These efforts were ongoing and they sought our advice for best practices.
	Decision		We recognized that implementing best practices can take time and viewed the company's receptive attitude toward investor feedback positively. We decided to maintain our position in the stock following the constructive dialogue with management, who we agreed to maintain contact with. As a follow up, we provided the company with input regarding the development of their remuneration plan, among other issues.
	Impact		The company reached out to us a few months after our engagement call to inform us of the addition of a qualified female director to their board, where previously there were none. The company also no longer flags as high risk following an improvement in the ESG score.

Case study 2

	Company description		European financials company
	Trigger		Decision to sell While the company did not flag on the ESG risk score, issues surrounding money laundering came to our attention.
	Review		Following news reports that the company was alleged to have been involved in money laundering activities at one of its non-residential branches, we monitored the developments surrounding the stock closely. It quickly became clear that the amount of suspicious transactions under investigation was substantial, leading to uncertainties around the potential size of fines, management changes, compliance costs and capital charges from regulators. Experts reported that the bank had ignored several red flags and did not take corrective measures.
	Decision		The case was at a relatively early stage and a formal investigation had not yet started, which made it difficult for us to draw any conclusions regarding the potential risks for the company. However, we recognized that the risks were elevated, especially given the regulatory scrutiny surrounding financial institutions. Additionally, if those risks turn out to be correct there would be little valuation support as many ESG focused investors would avoid that name irrespective of the price. We decided to sell the stock to limit the downside of our strategies.

Information contained herein is for informational purposes only and does not constitute investment advice or a recommendation to invest in any strategy or securities nor does it take into account the particular investment objectives, financial situations, or needs of any individual prospective investor. Investors should seek professional investment and tax advice.