Let's talk sustainability

SUSTAINABILITY is often cited as a mega theme in the investment world. For August Hatecke, co-head of UBS Wealth Management Asia Pacific, the theme has multi-generational implications well beyond asset markets. In its role as adviser to families and their businesses, UBS has stepped up to become an advocate for sustainability. In 2020, it became the first financial institution to make sustainable investments the preferred solution for private clients.

Hatecke says the landscape has changed considerably in terms of awareness and desire for sustainability. ''There is pressure from all angles. For families, the next generation does not want a non-sustainable business. The children tell their parents they do not even want to fly too often because it's not sustainable...

''For the family business, there is tension as well. It may be run by the first and second generations, or third and fourth. They ask - how can we become sustainable? There is pressure within the company. The next change is in capital markets. If you are not sustainable as a company, it will be very difficult to have an initial public offer. So you have to get your house in order.''

Seventy per cent of UBS' Asian clients are entrepreneurs and their interest in sustainability is keen, based on client inflows into sustainable assets over the past couple of years. Options offered by UBS include green bonds, ESG equities, managed portfolios and private investments.

As at the fourth quarter of 2021, the bank's flagship sustainable investment portfolios in Asia-Pacific hit a record US$5 billion, with almost 1 in 5 clients already invested. This is a 160 per cent year-onyear surge in assets, and 120 per cent in client participation.

In terms of discretionary assets under the ''UBS (My Way)'' platform, assets crossed US$2 billion in Apac, about 30 per cent of US$6.6 billion globally. More than 40 per cent of UBS (My Way) clients in Asia choose sustainability-focused building blocks for their portfolios.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign Up

Sign Up

My Way is a technology-enabled platform where clients can choose from a wide range of investment building blocks across asset classes, regions and themes to build their portfolios, which are then delegated to portfolio managers. The top 2 most popular building blocks are global sustainability single stocks and Asia single stocks.

On its part UBS has set itself a target to transition to net-zero emissions by 2050. It has had a long history of sustainable investing, and launched its first sustainability focused fund in the 1990s.

Hatecke says UBS' decades-long experience strengthens its conviction that sustainable companies should outperform in the long term.

''Every time a client comes in, the first thing we show him is a sustainable portfolio because we really believe in it ... One of the things clients are concerned about is performance. In the past no one really related sustainable investments with performance.''

Every investment in the sustainable portfolios is checked against a list of criteria, and compliance is also monitored.

The flagship sustainable investments portfolio is understood to have enjoyed strong returns since launch, outperforming broader markets in 4 out of 5 years since 2017. Last year, the portfolio appreciated by double digits in its balanced strategy with an equity exposure of just over 50 per cent.

For UBS, sustainability data and ratings complement traditional investment processes and do not supplant them. In the area of sustainable bonds, for example, the firm believes that returns are comparable with traditional bonds. ''However, as in traditional credit investing, picking the right names and bonds can also deliver outperformance,'' it said in a report on sustainable bonds. In light of forecasts for rising interest rates, UBS advocates ''cautious duration positioning'' into 2022.

Third-party funds on its shelf are evaluated not only on the sustainability profiles of underlying fund holdings, but scrutiny also extends to the investment processes. One of the relevant factors, for example, is whether the manager actively votes on proxies and engages with investee companies to enhance their standards.

Says Hatecke: ''As advisers, we have an important role to play, especially when it comes to protecting clients from losses and making sure clients do not invest in companies that are not ESG compliant. On the investment banking side we also advise companies on how to become ESG compliant. And for companies it's a difficult decision. There are many opportunities to generate business, but as a company you need to screen those opportunities...

''Part of our role is also to make sure we can contribute to the funds needed to finance the transition to net zero. This is where we as an industry clearly have an obligation.''

Last year, UBS' sustainability-focused and impact investing assets rose 78 per cent to US$251 billion.

Hatecke says clients are increasingly asking if their monies generate an impact. ''This is an important area where we try to come up with more solutions, so it's not just a matter of deploying money into an investment solution, but also deploying money where you can prove you make an impact.

''Especially when it comes to private investment in early stage companies, we see that companies with a strong growth potential and a sustainable agenda will be able to attract capital. We offer private investment or pre-IPO opportunities into sustainable companies. This is an area of interest among many family offices.''

He says the issue of greenwashing is a ''huge challenge'' for markets and investors. ''Every company wants to be ESG compliant in order that the company can raise cheap money, or raise money at all. Some of the efforts may simply be shortcuts.''

The pressure for transparency, however, may well lift all boats. ''Peer pressure will lead to strong transparency on all levels ... The more transparency there is, the more pressure will be put on companies. I'm personally very optimistic that nowadays with all the digital solutions and cameras from satellites we will be able to prove that someone is pretending. I see opportunity. Some may try to greenwash but it will be tough because regulators will not accept it and investors will push it away.''