Riding the ESG wave

Desmond Kuek Divisional Vice-Chairman and Head of the Sustainable Finance Committee, UBS Global Wealth Management

UBS utilises an internal ESG rating framework to assess whether fund managers have integrated ESG into their ''toolkit'' in a way that is relevant to their strategy. We do not just rely on external ESG ratings or accept a fund's label.

Instead, we apply a robust framework where the internal ESG rating framework is applied. This is done across the entire fund shelf.

We adopt a holistic deep dive across the entire investment process (exclusions, research, portfolio construction and engagement). Specifically, we look for funds where ESG considerations are well-embedded into the research work, not just to avoid risk but also to seek opportunities.

Beyond research, we need to see that ESG considerations have a direct impact on portfolio management activities in terms of position sizing, overall portfolio characteristics or thematic exposure. We need to see that there is targeted engagement linked to ESG issues, or for fixed income, that proceeds are earmarked for specific projects supporting environmental, social or political development.

We look for fund managers who have demonstrated strong thought leadership with regard to ESG investments and excellence with regard to investor transparency and education. They also need to show that they invest in their human capital base and research activities related to sustainable investing.

We see alignment with the SDGs (UN Sustainable Development Goals) and real economy outcomes as the next frontier in sustainable investment. Today, we can already track the alignment of portfolios towards a number of key topics which we've identified - such as climate change, water, pollution and waste, people, products and services and governance. Within our multi-asset 100 per cent sustainable investing (SI) portfolio, we consider ESG aspects, impact investing and exclusions along with traditional investment selection criteria.

At UBS, when it comes to impact on the real economy, we focus strongly on the engagement of portfolio managers with the companies they invest in. A good example here is engagement around climate, which has created tangible changes in the way companies develop their business models.

Not only do we monitor how companies are doing in terms of climate risks and opportunities today, but we also actively influence the glide path towards a low-carbon economy and the progress they are making towards limiting long-term warming. Through international standards such as the Science Based Targets initiative, this can be tracked and used in our investment process. We are also developing ways of showing this on a frequent basis to our clients.

A key next step will be the personalisation of the SI portfolio and client dialogue. With our latest innovation, UBS My Way, clients can customise their discretionary portfolio with access to a wide range of building blocks across asset classes, regions and themes in an iterative approach. On our advisory platform, we will offer clients the option to track their investments towards the key ESG topics most relevant to them.

Globally, our 100 per cent SI portfolio has crossed US$20 billion in investments and remains among the fastest growing solutions we have launched. Of these assets, the cumulative amount raised in Apac exceeded US$3.5 billion in Q1 2021, up from US$1 billion at the beginning of last year.

To ensure ESG alignment and the quality of our offering, we run a robust due diligence process on a product universe consisting of over 90,000 funds. We have internally developed an ESG screening process which allows transparency via sustainable profi les on a wide range of investment funds with ESG ratings available to investors. Our sustainable investing framework is based on an open architecture, and sources from multiple ESG data providers to guarantee the robustness and reliability of standards.

Sustainability can further enhance the quality of the investment solution as its performance has been not just equal, but mostly superior to portfolios where sustainability was not a key investment decision-making factor.

That's why we also offer sustainable options in our latest discretionary innovation, UBS My Way. Clients together with their advisers customise their portfolios and specifically consider ESG themes that are relevant to them. We see strong demand, especially in global equity focused sustainability building blocks.

Prashant Bhayani Chief Investment Officer, Asia BNP Paribas Wealth Management

At BNP Paribas Wealth Management, we have developed a comprehensive proprietary methodology to assess the degree of ''green'' in our funds. Of private banks, we believe we are among the first to have adopted and integrated a comprehensive methodology into our offerings, as well as actively embraced the sustainability objective in our process.

Asset managers are required to complete a questionnaire with 130 sustainability questions and undergo several interview discussions with our sustainability team. We analyse these questions in six categories: ESG practices & exclusions; voting & engagement policies; transparency; sustainability of the asset manager; level of impact sought; and quality of the sustainability theme.

A score is then calculated out of a maximum of 100 points, converted into a number of ''clovers''. We have a 10-clover system. To be considered as an ESG-integrated fund or sustainable fund, funds have to be rated with at least five clovers. Currently, 38 per cent of our active fund managers are rated five clovers and above. By end-2021, we would have 50 per cent of our active fund managers rated as such. We are quite pleased with this as we would have more than doubled the socially responsible investment (SRI) transformation of our fund range in two years. For a fund to be onboarded, it needs to clear both our traditional due diligence as well as ESG criteria. The criteria is comprehensive and our objective is to onboard strategies that meet this criteria, rather than lowering the criteria objectives in any way.

ESG is becoming mainstream and our corporate purpose is to help clients measure the environmental and social impact of their investments. Many initiatives are already in place to provide impact reporting for clients. Our general framework is the alignment with the 17 UN SDGs. We select thematic funds that correspond with the SDGs and require each fund to have additional reporting on the relevant ESG metrics.

We report the clover rating of all our equities, bonds and funds recommendations. This will be extended to other asset classes such as structured products and alternative funds. Our fundamental analysis also incorporates ESG indicators when analysing a company.

Clients can indicate their top six SDG preferences via a myImpact questionnaire and we provide them with a personalised approach in selecting investments that match their environmental and social preferences.

All discretionary mandates abide by the bank's Corporate Social Responsibility (CSR) sector exclusion policies. Prior to purchase, all direct-line holdings are screened against the bank's CSR monitoring and exclusion list. This negative screening is just the first step.

All discretionary mandates also have sustainability integrated into security selection. This is crucial to embedding it as an alpha factor. We use the bank's proprietary sustainability methodology to analyse the E-S-G indicators of each company, which translates the ESG score into a clover rating. The higher the clover rating, the higher the level of ESG integration.

How these companies integrate ESG considerations into their business model and operations is paramount. Factors could include the business model's adoption of climate change, pollution and waste, and environmental opportunities. They include investment in human capital; and finally, strong corporate governance is the glue that binds the factors. Companies with better corporate governance have outperformed over the long run.

Discretionary portfolio management (DPM) solutions include mandates dedicated to sustainability, in pure equity, pure fixed income and multi-asset classes. Under DPM, ''best in class'' SRI mandates select companies that are frontrunners in meeting ESG criteria. Such equity and bond portfolios have an average portfolio clover rating of seven.

For the ''best in class'' equity mandate, we have mapped the companies into one of three sustainable themes: Global Climate Impact; Green-Driven Consumption Patterns; and Social Inequality. These themes map into 14 of the SDGs.

For the DPM ''ESG-integrated'' mandate, funds are selected based on the degree of sustainability of the asset management companies and ESG criteria.

Currently we are at 80 per cent clover-rated, and aim to be 100 per cent by end-2021.

Benjamin Cavalli Head of Private Banking South Asia, Singapore CEO and Asia Pacific Sustainability Leader, Credit Suisse

Awareness is growing of the importance of sustainability; more countries and companies are committing to transition to carbon neutrality. At Credit Suisse, we continue to expand our ESG product suite in both equity and fixed income funds, recently adding Asian ESG funds.

Sustainability is a theme that will persist and we have witnessed widespread acceptance among institutional and retail investors. While there has historically been a lot of focus on the 'E' of ESG - environmental issues - the Covid-19 pandemic has accelerated the focus on the 'S', or social issues. Investment infl ows into thematic topics such as ''edutainment'', the gamifi cation of education, and healthcare are just a few examples of investors' focus on the 'S'.

As more players join the ESG space, we also see the landscape and regulations around it evolve rapidly, such as the recent introduction of the EU Sustainable Finance Disclosure. Providing transparency and facilitating choice for investors who seek products that match their ESG-related preferences are the main objectives of such regulation.

When selecting sustainable funds, we are aware of the many different ways to define sustainability and integrate ESG factors into an investment strategy. This is why Credit Suisse has defined its own ESG framework and minimum criteria for each type of sustainable strategy. We do not rely on external fund ratings of ESG data providers, but perform both a quantitative and qualitative analysis and use our own framework to select and categorise sustainable funds.

For example, we will pay close attention to the transparency and level of reporting, including sustainable key performance indicators, that a fund can provide. We will not recommend sustainable funds that are unable to provide even a minimum level of sustainability reporting, as transparency is key. For ESG-integrated strategies, we want to see clearly the positive results ESG integration has on a strategy, and understand how ESG has been incorporated into different parts of the investment process. We would be cautious of strategies that claim to be ESG-integrated, but where the portfolio ultimately looks very similar to non-sustainable funds. For thematic strategies, we look for purity aspects, how well an asset manager defines sustainable themes and the investment universe. A thematic strategy with a low level of purity to the theme, or with themes not clearly linked to environmental and/or social issues would raise questions from our side if they were distributed under a sustainable label.

Within private equity investing, the focus is on sustainable post-pandemic recovery such as transformative technologies supporting the SDGs. This allows investors to generate positive, measurable social and environmental impact in addition to financial gains. This year, we launched an innovative venture capital strategy with very tangible ESG themes that back disruptive technologies aiming to reduce carbon emissions and in turn limit climate change.

In the impact investments space, we take into account industry standards such as IRIS metrics, as well as the companies' existing data to measure, monitor and track impact during the investment period. In a fund where we focus on small and medium enterprises, we measure the impact at the company level, as well as aggregated at the sector and portfolio level. For example, a fund aims to improve the livelihoods of people at the bottom of the pyramid in Asia and has a few agriculture companies in its portfolio. We would track the total number of farmers reached, and qualify what that means individually across each company.

Our sustainable assets under management (AUM) in Private Banking APAC experienced robust growth in the last two years. This shows that sustainability is increasingly important to our clients, and hence, ESG-related products and solutions have become an integral part of our offering.

Our Asset Management APAC business has already converted all our discretionary mandates. Equity funds fulfil minimum sustainability criteria since 2020, and we are working to integrate sustainability into the investment process for all other asset classes. We are convinced that wholehearted integration of ESG criteria into our investment strategies will create superior and durable performance benefits, positioning clients to benefit from attractive investment returns over the long term.