Sustainable investing

Give your money a better future

Countless investment opportunities, but only one planet Earth. Yet that’s not the only reason sustainable investing pays off.

by UBS Insights 15 Jan 2020

They look the same and taste similar. The difference between the “Golden Delicious” apples on the shelf is small, but has big consequences for the environment – one of the apples comes from South Africa, the other from a Swiss organic orchard. Which should you put in your shopping cart?

More and more people are paying attention to sustainable criteria in the supermarket. What's less well known is that consumers can also invest responsibly on financial markets. In plain language this means not just looking at the return on an investment but also at its impact on the environment and wider society.

Dubious industries won’t make the cut

One of the first investors to look carefully at where his money was going was Philip L. Carret (1896–1998). In 1928 he founded the Pioneer Fund in the USA, one of the very first investment funds. Throughout his life, Carret had a talent for picking investments like no one else. Wall Street guru Warren Buffet reverently describes him as his “hero.” Carret always put ethics before profit, giving any investments that dealt with arms, pornography or gambling a wide birth.

In so doing he established the oldest concept for sustainable investing: strict exclusion criteria. Companies in dubious industries ended up on a “black list” instead of in his portfolio. Today, the exclusion method is still the most widespread principle employed to design a sustainable portfolio. It generally rules out investing in companies in the armaments, nuclear or tobacco industries.

Integrated rather than one-sided

Integration is rather more complex. In addition to basic financial data on an investment, e.g., liquidity, returns and risk, it means also taking into account environmental, ethical and social considerations. In technical jargon, we speak of ESG criteria, which stands for Environment, Social and Governance. Despite being an English acronym, the person who coined the term is actually Swiss: financial analyst and engineer Dr. Ivo Knoepfel, who was involved in UNEP, the United Nations Environment Programme for financial services. In overall terms, integration promotes the development of a holistic understanding of investments.

Sustainable Investing at a glance

Would you like to find out more about sustainable investing? UBS has summarized the most important information for you.

Farsighted and effective

Impact investing is the most far-reaching. The idea is to invest with the express intention of achieving both a measurable ecological and social impact as well as attractive returns. Impact investments are often investments in companies that are not listed on the stock exchange, because this is where you can exert the greatest influence. Another variant is active investment management, where shareholders deliberately exercise their shareholder rights and seek to dialog with the company’s board of management to motivate them towards a sustainable investment strategy.

Excellent potential returns

Over the last 40 years, the majority of the more than 2,200 scientific studies have shown that the incorporation of ESG criteria need not be at the expense of returns. On the contrary, over half of these studies showed a positive effect. After all, with sustainable investing the risks of, e.g., corruption and damage to the environment or reputation are lower. In addition, companies with sustainable value-creation chains tend to be very innovative. Sustainable investors support companies with future-oriented business models.

According to the Forum for Sustainable Investing, in German-speaking countries more money is being sustainably invested than ever before. Following many years of extremely rapid growth, the figure quoted is of almost 2.9 trillion euros, roughly equivalent to the GDP of Italy and Spain combined. Switzerland alone accounts for 716.6 billion Francs of this money, according to the association Swiss Sustainable Finance (SSF), of which UBS is also a member. In 2018, the rate of increase alone was 83 percent. This trend is likely to continue, because more and more institutional investors – such as pension funds – want to be sure that the money they are managing is being invested sustainably.

A solution for every need

As a pioneer in the field of ethical-ecological investments, UBS launched the UBS Eco Performance equity fund more than 20 years ago. Now called UBS Global Sustainable, this fund both applies specific exclusion criteria and actively seeks out ecological trailblazers. UBS now offers a wide spectrum of sustainable investments. It is also the first wealth manager to proactively market World Bank bonds. In this way, UBS helps the World Bank to finance sustainable investment projects in developing countries.

Last year, UBS was voted “industry leader” by the leading Dow Jones Sustainability Index (DJSI) for the fourth time in a row, the equivalent of a quality seal like the “Bio Bud” on a Golden Delicious apple.

Twenty years ago, the author, Stephan Lehmann-Maldonado, produced a 100-page study about ethical-ecological investing for the University of Zurich. He is pleased that niche products have since become mainstream.