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Michaela Seimen Howat, Executive Director at UBS, dispels the myth that investing sustainably compromises returns and explains why her firm is putting environmental, social and governance issues at the heart of its strategy.
Last week, the papers displayed a flurry of headlines around energy company BP’s pledge to achieve net-zero across its business by eliminating or offsetting all carbon emissions from the oil and gas it produces by 2050. Naturally, in the age of sharp scrutiny, reactions to the announcement were mixed, but many noted that BP’s share price rose in its wake. Several commentators took this as validation that investors no longer see ambitious climate change policies and a focus on using business objectives to tackle environmental damage as anathema to the pursuit of profits. In our view, they’re absolutely right.
There has been much ado about the specific role that sustainable investing – the set of investment strategies which seek to balance financial return with environmental and social good – has to play in tackling climate issues. Nearly 70% of investors willingly pay more for goods and services from companies whose values align with theirs but only 39% say they invest sustainably. Why such a mismatch? Investors just aren’t clear about what sustainable investing is, and how it can make a difference.
These strategies attract investors from both the public and private sectors in order to catalyse innovation and creativity, which should support compelling returns in the long run
Sustainable investing is not merely about excluding controversial activities. It does not constitute giving money away to solve environmental problems. It is neither philanthropy, nor dedicated to funding public sector projects. It can, however, cater to different risk-return preferences through strategies of integration, which combine sustainability information with traditional financial considerations; and impact investing, which aims to have a positive and measurable impact on society and the environment in addition to achieving financial return. These strategies attract investors from both the public and private sectors in order to catalyse innovation and creativity, which should support compelling returns in the long run.
For a long time, increased adoption was prevented by a belief that focusing on sustainable investing would inevitably mean a compromise on returns. This simply isn’t true. In fact, supporting a positive environmental or social impact as well as achieving compelling financial returns is at the very heart of sustainable investing and can even lead to better returns in the longer term. If done right, the two go hand-in-hand.
Supporting a positive environmental or social impact as well as achieving compelling financial returns is at the very heart of sustainable investing and can even lead to better returns in the longer term
There are three key factors to this, each of which overturns a specific misconception about this investment strategy:
Investors are increasingly recognising that performance and a more robust investment process can be achieved by focusing thoughtfully on sustainability-related trends, risks and opportunities.
For example, Gunnar Friede, Timo Busch and Alexander Bassen conducted a review in 2015 of over 2,200 studies into environmental, social and governance (ESG) issues and financial performance, and found that in roughly 90% of the cases explicitly integrating ESG criteria into the investment decision-making process had either a neutral or improving effect on returns.
The study found that those impact investment funds launched between 1998 and 2004, for which returns are largely realised, outperformed funds in a comparable universe of conventional private investment funds
The Impact Investment Benchmark by Cambridge Associates and GIIN in 2015 was the first comprehensive analysis of impact investment funds. The study found that those impact investment funds launched between 1998 and 2004, for which returns are largely realised, outperformed funds in a comparable universe of conventional private investment funds. Clearly, approaches informed by sustainable investing considerations do work.
Over the past few years, it has become clear that ESG issues are not only relevant to values-oriented investors but are also drivers of corporate financial performance and risk mitigation. Investors have increasingly recognised that these ESG issues need to be incorporated into investment processes as a core part of being a good investor; hence, sustainability has become a key value driver on company boards and among their investors. The launch of the United Nations’ Sustainable Development Goals in 2015 accelerated this and made clear that philanthropy and government investment can only go so far – private capital will need to do the rest of the heavy lifting.
We at UBS see the next ten years as the “Decade of Transformation”. The current shift in consumer preferences and government regulation toward more sustainable products and services is only just beginning and could prove to be the most exciting and durable growth opportunity of the next ten years.
The current shift in consumer preferences and government regulation toward more sustainable products and services is only just beginning and could prove to be the most exciting and durable growth opportunity of the next ten years
When it comes to making the most of the rich return opportunities that sustainable investing offers, it’s therefore key to ensure its commercial viability, in order to get businesses on board. Across the world, forward-thinking companies are focusing on the pressure points created by a rapidly de-globalising economy and society, using game-changing technologies to tackle them, and all offer opportunities to generate strong returns. Healthcare in emerging markets has seen rapid growth and is projected to continue at a rate of double digits. Education technology is thriving in Silicon Valley. Public transportation, urban design and redesign, electric vehicles and battery technology to complement renewable energy generation will be at the heart of this change.
Investors have become far more conscious of the environmental and social impact of how they deploy their capital, leading to an explosion of funds catering for these concerns. However, ensuring your portfolio really reflects your values and financial goals is a deeper exercise. Many of the wealth managers on our panel specialise in applying responsible investing principles, so why not discuss your aims with a professional via our free, fast matching service.
Around the world, while progress on sustainable investing has historically been hindered by misconceptions, we see that there is now a growing interest in market solutions to ensure that companies have a positive impact, and more investors are incorporating environmental, social and governance factors into their investment decisions. As a result, sustainable investing is becoming a key focus for the financial community, which has an increasingly important role to play in contributing to a more renewable society.
Sustainable investing is becoming a key focus for the financial community, which has an increasingly important role to play in contributing to a more renewable society
At UBS, we have a role to play in helping to change things for the better. We want to shape the future of sustainable investing because we believe it will soon be the world’s most widely accepted way of investing. In 2017, we announced our intention to raise US$5bn in impact investments over the following five years to help plug funding gaps needed to reach the 17 UN Sustainable Development Goals – and we are currently ahead of schedule to reach this target. Our offering for clients includes a 100% sustainable cross-asset portfolio and tailored private investment opportunities. With returns already strong, investors can and very much should position their portfolios to reflect sustainability risks and opportunities over the coming decade and beyond.
In 2017, we announced our intention to raise US$5bn in impact investments over the following five years to help plug funding gaps needed to reach the 17 UN Sustainable Development Goals – and we are currently ahead of schedule to reach this target