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Blazing a trail for impact
INVESTING for sustainability and impact has rapidly risen in prominence over the last couple of years. Union Bancaire Privee(UBP) laid the groundwork for its commitment to build an impact franchise around four years ago, borne of a strong conviction that as a family-owned bank it had to act responsibly.
The group's efforts were systematic and focused. Since it crystallised its commitment, the number of professionals focusing on impact has expanded. It now has four portfolio managers and seven analysts. It established an impact advisory board last year and developed close ties with the Cambridge Institute for Sustainability Leadership, a partnership which provides a helpful ecosystem in which to further its impact platform.
Last year it became a founding partner of Big Exchange, a cross-industry partnership set up to make impact investments more accessible to retail investors. This year it joined the Global Impact Investing Network (GIIN). As at end-September, UBP's impact assets reached US$193 million.
Its efforts were none too soon. Today, assets in sustainable and impact investments have snowballed. The onset of Covid-19 has in fact accelerated market developments in favour of sustainable and impact investments. Says Yvan Delaplace, UBP investment specialist: ''The world is changing fast and people are increasingly aware of the challenges they face as human beings. The ongoing Covid-19 has exacerbated the sense of emergency.''
Recent studies, he said, show that the majority of investors are interested in sustainable investing but do not have enough product choices. ''At UBP we aim to make sustainable and impact investing accessible and believe it should be possible for everyone to be able to invest in a way which marries their financial and ethical goals.''
UBP launched its first impact strategy in 2018 - the UBAM-Positive Impact Equity. ''Developing the strategy led us to establish our proprietary rigorous approach to measuring impact, and emerging markets seemed the most logical step forward to develop the franchise,'' he says.
As impact investors, UBP seeks both financial and impact performance. ''We needed to establish a methodology which would run through our decision making, from idea generation to impact measurement.'' With the help of the Cambridge Institute of Sustainable Leadership, UBP collaborated with the Investment Leaders Group to address the 17 United Nations Sustainable Development Goals (UNSDG) through six themes - climate stability, healthy ecosystems, sustainable communities, basic needs, health & well-being, and inclusive & fair economies.
The themes became the ''fulcrum'' of UBP's process. ''Each theme represents a number of SDGs, subgoals and industrial verticals. This allows for a real efficiency in the investment approach as the hunt for ideas is led from these areas, rather than the more traditional 'GICS' sector or geographical breakdown.'' GICS refers to the global industry classification standard developed by MSCI and S&P.
The EM region, in particular, forms fertile ground for impact investments; their manifold needs as defined by the UNSDGs are arguably far more severe and pressing than developed markets. Those needs present opportunities for investors. ''A significant proportion of (EM) populations do not have access either to water or to preschool or higher education. Companies that help to solve emerging markets' problems could well experience faster growth, a stronger regulatory tailwind and potentially superior profitability,'' he says.
There are, to be sure, a number of challenges. One is the quality of disclosure and reporting, which UBP takes in stride. ''Impact investors with a commitment to engaging with their portfolio companies can raise awareness and push to establish standards. Many EM companies are open to investor engagement and very willing to take their suggestions on board and draw on their experience.''
While UBP broadly takes an all-capitalisation approach to investments, impact investing through listed equities naturally leans towards mid-to small-cap equities for a number of reasons, says Mr Delaplace. EM companies tend to have fewer legacy issues. They also have more potential for successful engagement.
''We believe that the small and mid-cap bias offers additional potential sources of return, but this needs to be blended optimally with the client portfolio to improve the risk-return ratio.''
To help to mitigate risk, assessment of a company's ESG (environmental, social, governance) criteria is a key part of the investment process. ''This allows us to better understand the risks a company is facing, but also presents opportunities to generate alpha and increase the level of certainty regarding their forecasts. Companies with strong or improving ESG practices typically generate more sustainable cash flows and are less vulnerable to accounting irregularities, regulation change and associated fines or structural threats.''
Mr Delaplace believes sustainable investing will become a core allocation of clients' portfolios. As for impact investments, he says sizing of the investment is important given the natural bias towards small to mid-cap assets. This factor, he reckons, is unlikely to present a hurdle to growth.
GIIN has forecasted that the segment of impact investments, which doubled in 2018, will reach US$715 billion globally by the end of the year.
Mr Delaplace says the ''meteoric'' growth marks the beginning of a shift in preferences towards impact investments. ''But this journey just started, and it is our duty to engage with our clients and to make them aware of the benefits of impact investing.''