Sustainable investing services

The investment strategy is based on the risk-return profile that the client has chosen. ESG factors are key drivers, but not the only drivers of UBS investment decisions. UBS Sustainable Investing portfolios follow an ESG integration approach that combines ESG factors with traditional financial considerations. It involves understanding how investee fund managers and companies handle ESG risks that could entail significant costs or capture opportunities arising from major sustainability-related themes and trends.

UBS Sustainable Investing portfolios are constructed exclusively using SI approaches with ESG attributes defined by UBS CIO.

These SI approaches currently include (and may be expanded in future):

• Development bank bonds: bonds issued by multilateral development banks (MDBs). MDBs are backed by multiple governments with the aim of financing sustainable economic growth
• Green bonds: bonds that finance environmental projects. Issuers include corporations, municipalities, and development banks.
• ESG engagement equities: an approach where fund managers take active equity stakes in order to engage company management to improve their performance on ESG issues and opportunities
• ESG engagement high-yield bonds: an approach where fund managers take active bond positions in issuers with credit ratings below BBB- in order to engage company management to improve their performance on ESG issues and opportunities
• ESG thematic equities: equity shares in companies that sell products and services that tackle a particular environmental or social challenge, and/or whose businesses are particularly good at managing a single ESG factor, such as gender equality
• Improving ESG equities: equity shares in companies that are getting better at managing a range of critical ESG issues and opportunities
• ESG leaders equities: equity shares in companies that manage a range of critical ESG issues and seize ESG opportunities better than their competitors
• ESG leaders bonds: bonds issued by companies that manage a range of critical ESG issues and seize opportunities better than their competitors

Depending on the investment strategies used to optimize overall portfolio risk and return, the portfolio will contain differing exposures whose sustainable investments and ESG characteristics varies. The allocation percentage depends on a client’s risk profile. The allocations are implemented primarily via investment funds. When UBS invests via directly held securities UBS is focusing on an ESG Leaders approach, evaluating issuers on six sustainability topics (climate change, water, pollution & waste, products & services, people, governance).

As a funds distributer, when selecting investment strategies for SI-specific portfolios, UBS has a research process that regularly assesses funds across several research dimensions, for example people, process, philosophy, performance, risk and pricing. For a fund to be put on the shelf, it needs to be strong across several dimensions on an ongoing basis. In the people category UBS looks at the governance of a fund management company, including experience, quality of investment manager, and the firm’s incentive structures. A breach in any dimension, may impact the future expectation for the fund. This leads to a heightened monitoring or removal.

When selecting direct investments for client portfolios, UBS looks for companies that are fair and transparent on issues such as executive pay, board independence, tax and anti-corruption, and governments that promote strong institutions and rule of law and commit to international treaties on environmental and social issues.

The integration of sustainability risk in investment decision making and advisory processes is included in UBS`s policies governing these processes. The policies, amongst other things, include guidelines that analysts need to observe when forming their independent views.

When assessing securities of single issuers (equity and debt) or investment funds, sustainability risks, among other financial risks, are considered when conducting the financial analysis of issuers and fund due diligence:

• The evaluation of sustainability risks and their materiality is one of the numerous factors determining whether or not securities of single issuers are recommended and, therefore, in how far such instruments should be selected in investment management mandates and in investment advice. Sustainability risk is explicitly referred to in the Principles and methodology of research in Global Wealth Management CIO Investment Office. The document can be viewed here.
  
• Fund due diligence focuses on strategy, and how a fund manager captures risks and opportunities (including ESG risks and opportunities) in their investment process. It is not an assessment of the individual holdings within a portfolio. As part of standard fund due diligence, UBS Wealth Management CIO evaluates an ESG rating for each fund. While sustainability and other risk topics should be considered by every manager, it is likely that funds with higher ESG intentionality ratings carry less sustainability risk given that more focus and resources are placed on research, investment decisions and/or active shareholder engagement. A fund manager`s lack of integration of sustainability risks in its investment decision making process will typically result in a lower ESG rating.

During investment research and due diligence, UBS aims to identify financial risks (including sustainability risks) with a view to managing overall portfolio risk.