Sustainable Investing: A driving force in our industry
Global Investment Insights
with John Mowat, Acting Country Head Australia and New Zealand (ANZ), UBS Asset Management
Sustainable Investing is not new to UBS Asset Management (AM). Since 1996, the company has had a specialised team in sustainable investments and has continuously developed its product range through time. Today, UBS AM is a leading provider of sustainable investment offering, with all Active Equity and Active Fixed Income strategies integrating sustainability criteria.
To find out more about some of their initiatives and views on Sustainable Investing, GII sat down with John Mowat, the Acting Country Head of UBS AM for Australia and New Zealand.
Q. Investors in all parts of the world are increasingly seeking not only strong risk-adjusted returns, but also put their money into companies that positively impact on environment and community. This has translated into accelerated growth in sustainable investments in recent years.
What do you see as the key factors driving sustainable investing?
A. We have identified four factors that contribute to this enormous growth. First, there is a shift in societal values.
Public awareness of ESG-related risks and opportunities has placed sustainable investing at the top of the global agenda and led to the creation of major milestones, including the Paris Agreement and the UN Sustainable Development Goals (SDGs). The COVID-19 pandemic has further highlighted the materiality of ESG issues.
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Up to 77% of institutional investors plan to stop investing in non-ESG products by 2022, according to a recent study by PWC[1].
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Second, perception of risk has changed. Institutional investors, in particular pension funds, are pivoting toward sustainable investing, driven by growing regulatory obligations and changing perceptions of their fiduciary duties. Up to 77% of institutional investors plan to stop investing in non-ESG products by 2022, according to a recent PWC study[1].
The third factor is Sustainable Investing performance. Evidence strongly suggests that investing in sustainable investing-focused funds won’t compromise returns, particularly in the active space: a 2020 study by Morningstar of more than 700 European sustainable funds showed that over one, three, five and ten years the majority of those funds outperformed non-ESG funds. COVID-19 has further highlighted the resilience of sustainable investing-focused funds in distressed markets.
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Evidence strongly suggests that investing in sustainable investing-focused funds won’t compromise returns, particularly in the active space.
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Finally, there’s regulation. Growing regulatory pressure is increasingly driving institutional client demand, particularly in the EU. Changes to existing regulations, led by the EU Taxonomy and Sustainable Finance Disclosure Regulation, look set to make reporting on ESG outcomes a requirement for client disclosures, which, in turn, will fundamentally underpin the continued flow of assets into sustainable investing funds. We are seeing regulators in various markets intensify their focus on sustainability.
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Q. The impact investing sector is by far the smallest portion of the overall ESG investing universe in Australia. However, as ESG investing has caught on with a range of investors, impact investing strategies are being applied to a wider range of assets, including listed companies and sustainability-linked bonds and other vehicles.
How do you at UBS AM define Impact Investing?
A. In the financial industry there are three common concepts about impact investing and how it can be measured and generated.
Intentionality – the desire to contribute to solving social or environmental problems;
Measurability – having a framework that can demonstrate qualitatively or quantitatively that a company or investment strategy makes the problems better; and,
Additionality – the idea that the fund manager/investment strategy provides part of that benefit through the process of investment.
Q. As always, the devil is in the details.
How can the above-mentioned concepts be implemented when it comes to assessing the impact an investor has on a company?
A. You have got to be measuring the impact of products and services, and you have to engage with the company to improve the impact that a company has.
The intentionality aspect of it is interesting in public companies – you cannot confuse impact with sustainability.
For example, you could have a perfectly sustainable candy bar company, in terms of how it is managed, the board, the energy profile, where the ingredients come from and how they are stored, but you cannot link the product to a social goal or one of the United Nations Sustainable Development Goals (SDGs). It really has to be about the products and services and can you map them to something that is a global issue and that solves a problem.
However, it is possible to ascribe additionality in public markets investments. First you have to have a universe of companies that have products and services that you can credibly tie to a goal. In our case, we started with four big areas – health, water, climate and food security. We then set about to develop science-based models to measure outcomes in the world we live in.
Q. While there isn’t a direct link between positive impact and investment return, can such an impact still contribute to a positive financial outcome?
A. If you overpaid for a company, all bets are off. If you are thinking about the valuation of a company in a rational way, you have got to be investing in companies with valuation in mind. But if you are a company that delivers a product or service that solves a pressing need, you have a ready market.
Secondly, that product or service is probably something that will resist competition, so the return on assets and equity are pretty durable.
Q. A big effort is required when it comes to fighting the negative consequences of climate change. Investors can make a significant contribution.
What is UBS AM’s strategy with regard to having a positive impact also in this regard?
A. Our Climate-Aware investment strategy has been continuously evolved and we now offer a broader range of products based on it. However, the climate change crisis is still with us and we see the need to accelerate action to stay within the current emissions budget.
We have made climate change a core element of our overall investment strategy and intend to continue efforts to align our portfolio with net zero ambitions.
A core element of this is our dialogue with investee companies. We want to work with corporate management to transfer best practice and explore new ambitious solutions.
[1] https://www.pwc.lu/en/sustainable-finance/esg-report-the-growth-opportunity-of-the-century.html
John Mowat, Acting Country Head, Australia and New Zealand, UBS Asset Management
John Mowat was appointed interim Country Head for the Australia and New Zealand UBS Asset Management business in May 2021. In this role he has responsibility for the management and strategic development of the business in Australia and New Zealand. In this capacity he reports to the Head of Asset Management, Asia Pacific.
John joined UBS Asset Management's Real Estate & Private Markets (REPM) business in 2010, relocating to Sydney in 2015, and is also currently responsible for managing REPM's real estate business in Australia. Before moving to Australia John was based in Europe with UBS as a member of the real estate portfolio management team and prior to UBS, John worked for AX Real Estate Investment Managers.
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