Sustainable investing Measure what matters

Sustainability factors should be part of a fundamental valuation process. How has UBS Asset Management used its own multi-stage valuation model to do incorporate these factors?

22 Nov 2017

The key to successful active equity investing is having the ability to accurately determine a stock’s intrinsic value in order to generate excess returns by taking advantage of market mispricing, and we believe the quality of that assessment is critical to success. For that reason, UBS Asset Management has used a proprietary multi-stage valuation model for more than thirty years.

Evidence has mounted for many years that expanding the mosaic of data to include material non-financial factors is additive to the investment process. As reporting standards for material sustainability data evolved over the last decade, we set out to develop our own sustainability database and methodology for scoring companies in order to enhance the valuation process. While there are useful ESG ratings for purchase (as there are earnings estimates), we wanted to ensure that we selected the underlying data we believed to be material and that would provide an input to the process where we owned the entirety of the value chain. The architectural framework for our database parallels the Sustainable Accounting Standards Board (SASB) Materiality Map with customized KPIs for different industries.

This process allows us to have an objective ESG score which is transparent, comparable, and which reflects our proprietary assessment of a company’s sustainable profile. The goal of the Sustainable Investors team is to identify stocks that are both attractively valued from a relative valuation perspective and have a strong sustainability profile. It is our belief that these companies have the greatest upside potential given their valuation, and less downside risk given the quality of management and best practices displayed by their strong sustainability performance.

The benefit to our clients and our process is very clear—a sound, traditional approach to the estimation of intrinsic value that is enhanced by the structured inclusion of material ESG data.

More insights