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Channelling capital towards sustainable investments
SUSTAINABILITY has emerged as one of the most powerful trends in the investment world as investors wake up to the pressing need to address environmental ills, and social and governance issues. Lapses on those dimensions pose potentially costly and long-tail risks for investors.
Wealth and asset managers are stepping up to channel capital towards sustainable investments, largely to help enhance risk management for clients and ultimately to move the needle in terms of sustainability. Private capital, after all, is a powerful tool for positive change.
UBS’s sustainability efforts took root in 1997 when it launched its first socially responsible investment funds. In recent years, it has stepped up even more decisively to marshal funds towards sustainable investments, as it recognises the fact that public funds alone are vastly insufficient for the world’s most pressing needs. In 2017, it committed to raise US$5 billion by end-2021 for impact investments that further the United Nations Sustainable Development Goals.
To date, UBS’s sustainability drive has resonated among Asian clients. In 2018, for instance, it launched a 100 per cent cross-asset sustainable discretionary mandate in Asia-Pacific. This mandate has since grown to US$1 billion and currently has a share of close to 20 per cent of all Apac mandates. This means that on a net sale basis, more than one in six new US dollars added to the bank’s mandate book is a sustainable discretionary investment. UBS manages a total of US$488 billion in core sustainable investments as at 2019, a rise of 56 per cent.
Mario Knoepfel, UBS Global Wealth Management head of sustainable investing advisory, says sustainability is a growing focus among entrepreneurs who comprise the majority of Asian clients, and they have found that sustainable investments can generate returns that are on par or greater than traditional investments. “We also observe that an increasing awareness of sustainability and innovation in (clients’) own businesses is driving a mindset shift in many of our clients’ investment philosophy.”
He adds that sustainable investments also help clients de-risk their businesses and meet mounting consumer demand for sustainable solutions. In such investments, there are typically two key areas of focus. One is an “enhanced analysis” of companies’ business models to minimise the downside risks linked to weak management. Second is to look for businesses at the forefront of innovation and best-positioned to capture future growth. Favoured sectors include healthcare and mobility.
The balanced strategy of the cross-asset sustainable discretionary mandate returned more than 18 per cent last year with an allocation of about 50 per cent in equities. The mandate includes investments into the bonds of sustainable development banks such as the World Bank and Asian Development Bank, funding projects to enhance access to healthcare, education or clean energy in developing nations.
Based in Hong Kong, Mr Knoepfel advises clients and family offices on sustainability, helping them to incorporate personal values in their portfolios, and invest with social and environmental impact through public and private market solutions. He leads UBS’s efforts to mainstream sustainable investments in Asia. He moved to Asia in 2013 to establish a Hong Kong presence for the UBS Optimus Foundation, which helps clients to fund and manage projects benefiting underprivileged children globally.
He says impact investments are yet another area of interest among Asian clients. This is a class of investments that has an explicit impact goal and tends to comprise investments in private enterprises. “We’ve been working with leading third-party managers to offer our clients access to longer term private markets impact investments, giving them the opportunity to invest into growth companies that, through their goods and services, positively contribute to addressing social or environmental challenges…”
An example of an early stage private equity impact fund is the UBS Oncology Impact Fund, which focuses on investments into the development of cancer therapeutics with the twin goal of generating financial returns and making a positive impact to extend and improve the lives of cancer patients. Apac clients committed US$275 million into the fund. Interestingly, the onset of Covid-19 has intensified client interest in sustainability. “Going forward, we expect increased investor focus on ESG considerations after Covid-19, with particular demand for greater corporate transparency and stakeholder accountability.”
In particular, the crisis refocused attention on the importance of social factors. Singapore is an obvious example, where Covid-19 infections exploded because of poor and congested living conditions among foreign workers.
Covid-19 has also focused world attention on the issue of public health. “It is likely that many investors will increasingly be interested in investment opportunities, access to medicines, and also education or sustainable tourism.”
Apart from the cross-asset discretionary portfolio, thirdparty funds on UBS’s platform are evaluated on their sustainability profile as well. This includes scrutiny into the sustainability profile of fund holdings and the importance of sustainability in the fund’s investment process, and also examines whether the fund manager is actively voting their proxies and engaging investee companies to enhance their standards. The analysis also covers traditional funds which do not have an intentional sustainability focus to allow advisers and clients to make informed decisions.W