Why doing good can be good for your portfolio

Are individuals and institutions feeling bullish about bettering the world? Here’s how sustainable investments aim to benefit their portfolios—and society.

Imagine it. You’re a smart investor with a portfolio that’s respectable, but you know it could be better. You want the dollars to work hard and yield returns, but to get there, your strategy might need some nuance. You look to put your money into an enterprise with a stable workforce and good reputation; making headlines for doing the right thing. Just a few years ago, some of your industry peers might have said this approach lacked muscle, or an appetite for winning, but in 2019, it’s not the outlier way of doing things. It’s called sustainable investing—which looks at environmental, social and governance (ESG) factors to inform investing strategies—and it's increasingly the norm¹. So what caused this shift, and why are institutions and individuals recognizing its advantages?

Sustainable investing can potentially be an effective approach for optimizing one’s portfolio. This can be done through several approaches, such as excluding companies that aren’t aligned with an investor’s values or by integrating ESG factors to help improve portfolio risk or returns.

ESG-related investments are often connected to prevailing economic trends. Plus, taking responsibility for the well-being of employees and the community at large can help with managing long-term investment risks.

“Sustainability doesn't mean giving up returns, we believe it can help improve the investment process by adding more pertinent non-financial information based on your overall objectives. We've reached a ‘Why not?’ moment,” said James Purcell, Head of Sustainable and Impact Investing at UBS Global Wealth Management's Chief Investment Office.

Today, over $30 trillion of assets have been self-identified as being invested sustainably, in part because some institutional and government investors are compelled by evolving regulations or public outcry to get on board². (Norway’s $1 trillion sovereign wealth fund, for example, has increasingly firm sustainability guidelines). It’s also the result of sustained and consistent effort from organizations like UBS that have championed sustainable investing for decades.

“Long-term, responsible investing—incorporating clear environmental, social and governance criteria in investment—is increasingly promoted at the policy and regulatory level,” says Michael Baldinger, Global Head of Sustainable and Impact Investing at UBS Asset Management. “UBS Group has responded to these trends with a clear commitment to take a leading role in helping to shape a positive future.”⁵

UBS recently polled some of the world's leading pension funds, and 78 percent said they already integrate ESG into their investment process. Over two-thirds do so because they believe it improves the risk profile of their investments and almost half think it will have a positive impact on financial performance.⁶

Sustainable investors aim to make better-informed investment decisions by assessing the most important sustainability factors and integrating them into their decision-making process, alongside more traditional financial analysis.

For example, a company experiencing severe environmental issues might be penalized by regulators for breaching a certain set of standards. As a result, consumers may punish the company—brand loyalty may dwindle—in which case, the company's bottom line is likely to be negatively impacted. In other words, an investor looking at ESG factors would look to avoid this type of business.

It’s easy to see why sustainability has become such a driving force across financial markets and why it appears to resonate so strongly with both large-scale institutional investors and private individuals.

In fact, sustainability is now deeply embedded within the investment process. A recent UBS survey revealed that the majority of European investors believe that within the next five years, environmental factors are likely to be of greater importance than financial factors when assessing whether or not to invest in a company⁷.

Those who are unsure of what sustainable goals actually look like in practice often turn to the United Nations’ Sustainable Development Goals (SDG)⁸, an eye-opening blueprint aimed at addressing poverty, inequality, climate, environmental degradation, prosperity and peace and justice. They can also look to UBS, which built the first 100 percent sustainable investment offering for private clients⁹ (as of September 29, 2019, counting $7.16 billion of global assets under management), to team up with research scientists and institutional clients to match investments with specific SDGs.¹⁰

"Investing in the future you want to see doesn't just mean excluding certain activities from your portfolio, but proactively directing capital to the exciting industries of the future,” said Purcell.

Investors definitely embrace the concept of sustainability. Last year, UBS research found that adoption of sustainable investing is expected to grow significantly, from 39 percent of investors to 48 percent over the next five years. At the same time, many investors expect to increase the allocation of sustainable investments in their portfolios. The research also found that 58 percent of investors expect sustainable investing to become the standard approach in 10 years.¹¹

“We put considerable emphasis on sustainability because we truly believe that doing good for society is not only the right thing for investors to do, but the smart thing to do, as well,” says retired general David Petraeus, current chairman of the KKR Global Institute. “Companies in which we invest inevitably struggle if they damage the environment, run afoul of social norms or skirt legal requirements. And our success depends on making successful commercial investments. Otherwise, our clients understandably will not give us their money. In short, we believe in doing well while also doing good.”¹²

In the end, does sustainable investing pay off? In terms of global impact, it certainly does. Some of the biggest partnerships have already yielded noticeable progress. Rockefeller Foundation Managing Director Olivia Leland recently created Co-Impact, a global collaborative aimed at driving social change. The program has drawn together leading philanthropists, governments, non-profits and large companies in the private sector.¹³

Meanwhile, similar initiatives, like Impact Water, which has made strides in increasing access to clean water and sanitation in Africa, and MSD for Mothers, which aims to improve the quality of private sector healthcare facilities in Rajasthan, India, are proving the power of impact bonds.

The financial benefits can be significant as well. UBS research—along with 2,000 other studies—has found that sustainable investors see no trade-off between their personal values and their returns. A full 93 percent believe sustainable investments can generate equal or better financial performance when compared to traditional investments.¹⁴

It’s that no-compromise conclusion that’s drawing more and more individual investors and institutions into this fascinating and impactful marketplace. “We’ve made a strategic decision to place sustainable investing firmly at the heart of our investment business, drawing on an already strong legacy of more than two decades of sustainable investing,” says UBS’s Baldinger.¹⁵

Though sustainable investing has picked up significant momentum in recent years, the concept isn’t new, with UBS taking an early and powerful leadership role. Over the years, UBS’ partnership and collaboration with a number of private and public sector entities has added legitimacy and influence to this investment approach; read on to see how and when the company has helped advance this important shift.¹⁶

1. https://www.ubs.com/content/dam/ubs/microsites/ubs-investor-watch/IW-09-2018/return-on-value-global-report-final.pdf -page 7

2. https://www.bloomberg.com/news/articles/2019-04-01/global-sustainable-investments-rise-34-percent-to-30-7-trillion

3. Scorpio Partnership's "Global Private Banking Benchmark 2018" rank of global wealth managers by assets under management.The awards were independently determined and awarded by the publications’ editorial teams. UBS did not pay a fee in exchange for these awards.

4. GRI Report, 2018 – page 88/89

5. UBS Report: “ESG: Do you or don’t you?” p. 4

6. https://www.ubs.com/global/en/asset-management/insights/sustainable-and-impact-investing/2019/esg-do-you-or-dont-you.html

7. UBS Report: “ESG: Do you or don’t you?” p. 4

8. https://www.un.org/sustainabledevelopment/sustainable-development-goals/

9. https://www.ubs.com/global/en/ubs-news/r-news-display.html/en/2019/05/21/generation

10. https://www.ubs.com/ch/en/asset-management/distribution-partners/insights/white-papers/2018/partnerships-for-the-goals.html

11. https://www.ubs.com/us/en/investor-watch/return-on-values.html

12. Only applicable for Global Asset Management Institutional Investors

13. https://www.ubs.com/global/en/wealth-management/chief-investment-office/investment-opportunities/sustainable-investing/2019/wef-2019.html - page 12

14. https://www.ubs.com/us/en/investor-watch/return-on-values.html

15. UBS Report: “ESG: Do you or don’t you?” p. 4

16. GRI Report, 2018 – page 88/89

17. Product not available in the US.

The value of investments may fall as well as rise and you may not get back the amount originally invested.

Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower or higher than a portfolio where such factors are not considered by the portfolio manager. Because sustainability criteria can exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability and/or impact performance.

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In providing wealth management services to clients, we offer both investment advisory and brokerage services which are separate and distinct and differ in material ways. For information, including the different laws and contracts that govern, visit ubs.com/workingwithus.

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