ESG integration: Engaging with companies

Integrating ESG into our investment strategies is core to how we invest. Learn how we engage with companies to drive sustainable investing.

11 Sep 2019

By Bruno Bertocci, Head of the Global Sustainable Equities team and lead Portfolio Manager; Joe Elegante, Senior Portfolio Manager and Alix Foulonneau, Analyst

In the early days of responsible investing, sustainable investing (“SI”) was largely defined by the exclusion of certain types of investments, as investors chose not to support companies involved in products deemed harmful to society such as weapons, tobacco or gambling.

But more sophisticated approaches have emerged, including thematic and best-in-class investing. In our SI-focused strategies managed by the Global Sustainable Equities team, the investment process is designed to identify companies that are sustainability winners and benefit from sustainable trends. We use sustainability factors not only to mitigate downside risks but because we see sustainable growth opportunities.

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Integrate ESG factors into investment strategies

In recent years, UBS-AM focused on developing SI capabilities across all asset classes. Our objective is to systematically integrate ESG considerations in all investment strategies. ESG integration is a way of evaluating intangible factors that matter to a company's performance alongside traditional fundamental financial analysis. Today, we reached an important milestone with most of our fixed-income and equity investment teams integrating ESG considerations. We believe integration is demonstrated by the depth of our engagement activities which bring together the efforts of the SI Research and Stewardship team with individual investment teams to influence change at investee companies, ranging from adoption of climate mitigation policies to changes in management.

As these efforts have led to enhanced stock research practices and stimulated dialogues with companies, we discuss how they can benefit our SI-focused strategies in equities.

Engagement goes a step further

Engagement plays a key role in driving sustainability integration. Corporate engagement deepens our knowledge of, and confidence in the companies in which we invest. As such, we regard it as an intrinsic part of the investment process. It offers unique opportunities to realize material change for companies and better long-term returns for clients.

Corporate engagement implies a two-way dialogue between investors and companies, with the goal of improving transparency and business performance, in terms of ESG issues, strategy, risk management and capital allocation. On the one hand, investors can share their expectations of corporate management and encourage practices to enhance long-term value. Companies meanwhile have the opportunity to explain the relationship between sustainability, their business model and financial performance.

The intensity of UBS-AM engagement activities has ramped up in the past couple of years and in the 12 months to December 2018, we engaged with 195 companies. At the last PRI survey1 – the reference to assess asset managers' commitment to SI – UBS-AM received an A or A+ in all categories, and most notably received an A+ in the Strategy and Governance module for the second consecutive year.

In practice, support from SI experts in the investment process arms equity analysts with deeper resources, which leads to meaningful engagements. Information is shared as all engagement activities are recorded on our equity research library platform, and goals are set and tracked in the system. Within our investment teams, this has created an enthusiasm for building strong dialogue with corporates, adding to individual teams' existing practices.

Engagement equation: 1+1=3

The SI Research and Stewardship team integration program promotes collaboration across investment teams to align engagement objectives and "weight" behind the requests we are making to corporates.

The Global Sustainable Equities team benefits greatly from this momentum as we primarily use internal sources for ESG research: UBS-AM ESG Model, and the Equity and SI analysts' team. Leveraging these resources, we find:

  • Companies' disclosure on ESG topics is improving but the absence of internationally accepted standards is an important barrier for us eager to assess companies' sustainability profiles in a consistent manner with our proprietary ESG Model. Yet we find that by building relationships with companies and engaging early on in sustainability matters, we are able to gain great insight into the culture of a company, its Board and overall practices (intangible assets).
  • It is important to note that we do not use the ESG scores as a single basis for decision making. The scores are a first step. They allow us to prioritize our research universe, providing us with insights, alongside those generated by the ESG specific questions completed by the Equity analysts in their company research notes. We use those insights in our qualitative discussions with our Equity and SI Analysts.
  • This deeper level of analysis is critical to our holistic security analysis, an analysis that seeks to identify sustainability metrics which are clearly linked to a company's superior competitive positioning and future value creation for shareholders. We collaborate to identify engagement goals in advance of investing in a company or during the life of an investment, should the need arise.

At UBS-AM we firmly believe that working together with companies on the most material drivers of long-term value represents a valuable way of stimulating long-term financial performance.

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