There are more sustainable investment choices than ever to align with your priorities, allowing you to create a diversified portfolio across asset classes. The universe of sustainable investments spans bonds, equities and alternative investments including private equity, private credit, real estate and infrastructure. This diversification enables risk and return for investing sustainably that is comparable to that for traditional investment portfolios. We believe that incorporating environmental, social and governance considerations into your investments is consistent with generating financial returns.
Two things are key to investing successfully for the long term: relevant information and diversification. Sustainable investing makes the most of both. In fact, investors can construct fully diversified portfolios entirely from sustainable investing exposures.
In equities, for example, investors can use data-driven approaches to identify best-in-class environmental, social and governance (ESG) leaders across sectors and geographies, or they can choose companies that actively address ESG-related improvements within their business models and operations. Green bonds have emerged as a frontier strategy in fixed income, where investors fund environmental projects within mainstream companies. Debt from multilateral financial institutions like the World Bank provides government bond-like risk/return while financing impactful projects in emerging markets. Investing in SI-aligned structured products takes advantage of short-term market opportunities, while investing in private companies with impact focus (for example, via private equity funds) aims at creating long-term impact and financial returns.
Prudent investors consider all the factors that could affect the future prospects of their overall portfolio as well as each of the underlying investments. For too long, ESG issues were considered non-financial in nature. Many investors now acknowledge that these factors can be material and highly relevant to investment analysis.
“Forward-looking investors recognize that risks like climate change can impact portfolios, while issues like employee health and safety or workforce management can affect corporate financial performance,” says Andrew Lee, Global Head of Sustainable and Impact Investing, UBS Global Wealth Management. “Whether you're motivated by sustainable outcomes or not, all investors need to consider environmental, social and governance issues which could have financial implications.”
The broader trends
Part of the momentum is propelled by broader trends. Consumers increasingly demand sustainable products and services. New regulations create potential opportunities for companies in certain sectors, such as the European Green Deal, which prioritizes directing pandemic recovery spending to rebuilding with the aim that the European Union will be carbon neutral by 2050. Finally, corporate performance on issues such as pollution or employee treatment can impact profitability and financial performance; incorporating assessment of these ESG factors is key to thorough risk/return analysis.
Sustainable investing has expanded beyond equities to fixed income, including green bonds and bonds from multilateral development banks, and alternatives such as private equity, private credit and real estate. Investors also can choose thematic investing, which focuses on topics like health care access or waste management. For example, a portfolio built around the waste theme can include companies that directly address waste, bonds for waste management or recycling projects, and/or companies that outperform on waste and pollution metrics.
“Investors are demanding and driving sustainable investing,” Mr. Lee says.
Awareness is growing
Meanwhile, the Covid-19 pandemic has accelerated awareness of the relevance of ESG factors for investors. From potential root causes to the clear economic and financial implications of the health crisis and the resulting lockdowns, the linkages are increasingly clear to many observers. In particular, Covid-19 has brought to the fore the increased importance of health care and many other social issues, such as how companies approach topics like employee health and safety or workforce reductions.
During the first half of 2020 in which there was significant market volatility resulting from the spread of Covid-19, sustainable investing funds experienced inflows, compared with outflows for conventional funds1.