UBS Trending: SI: You asked, we answered. Pt. 1
Hello everyone and welcome to UBS trending.
I'm Anthony Pastore. Sustainability is top of mind and continues
to be one of the key investment ideas for the
UBS Chief Investment Office.
And now as it mainstreams,
however, we do continue to hear questions from investors like
you and in the markets there is this broad debate
on.
Sustainable investing, impact investing as well as ESG.
So to address all of these questions and do some
mythbusting which is of course our favorite part.
We are producing a four part series called "You asked,
we answered," and we're going to cover things like what
is a sustainable company?
How do I know if it has any impact?
How do I invest? What does performance look like?
And the big question is,
is sustainable investing for me as an individual investor?
So joining me to answer all of these questions in
this
4-part series is no stranger to UBS trending Amantia Muhedini,
sustainable investing strategist from our Chief Investment Office.
Good to see you Amantia.
Great to see you Anthony.
Yeah, so as as I mentioned in the intro,
part one of four is today and we're really going
to focus today on the idea of impact.
And if I'm looking at a particular strategy,
is it actually making the impact that I hope it
does?
Because if I'm investing in sustainable investing,
it seems like the point is you want to make
sure it's doing something good or something that you believe
in or an impact.
Which I know you're going to talk about,
but I wanted to just - let's do a level set.
Talk about, for especially for those who are watching today,
who and I'm speaking for them.
By the way, I'm speaking,
I've done a lot of shows with you.
I've read a lot of your reports,
but today I'm going to speak on behalf of the
folks that don't really know much,
so remind us. What's sustainable investing and impact investing are
great, so let's start there.
So, sustainable investing we think of as a set of
investment strategies,
or really as an investment philosophy.
So it's not. It's not,
you know, product. It's not an asset class.
It's an investment philosophy that looks at incorporating sustainability considerations
in the investment analysis and using these sustainability considerations as
a key driver of instrument selection.
In other words, sustainability is one of the key reasons
why an investor would be looking to invest in in
kind of company A versus Company B.
For example, issuer A versus issuer B. Now sustainable
and impact investing right?
All of these terms ESG, SRI so many acronyms.
Very many and people heads explode with them.
It's true yes, and we spend a lot of our
time thinking about.
What are the distinctions? So we think of impact investing
as slightly distinct from sustainable investing related,
but think of it more as a subset of sustainable
investing.
Where in sustainable you're looking at sustainability to help you
select the companies or other issues you're investing in.
Impact investing. You're doing that,
but also you're aiming for measurable,
intentional and verifiable positive social change.
Or positive environmental change. So really,
not all sustainable investing have this measurable,
verifiable positive change, and that's OK.
And we can talk about that.
So we. But we want to be to be clear
about kind of the all encompassing concepts and the benefits
of each approach.
OK, so let's focus then on for our audience.
What a sustainable company is if if I care about
sustainability as an investor,
how do I know that I'm investing sustainably?
I mean. It's a great question and it's a tough
question,
so I would say and maybe you won't like this.
The answer depends, so it depends on what you consider
sustainable and what's the the metric or towards what's the
dimension that you're using to evaluate the company.
So let me give you an example.
Firstly, you can look at how a company is running
its operations,
how is it treating its people?
How is it managing its own carbon footprint emissions?
Water emissions for example? How how its governance runs,
and if it's transparent and so forth.
So all of these are ways of looking at whether
a company is operationally sustainable.
So that's one way in which you can do this
evaluation.
A second, distinct and complementary,
but different way is to look at not just.
You know how companies making stuff quote UN quote,
how it deriving revenue, but but what is it that
is deriving revenue from?
So you could look at companies that are deriving revenue
from products and services that are,
you know, aligned to, for example,
the United Nations Sustainable Development Goals.
And let's say that you really care about water.
You think water scarcity is a challenge.
You also think there are opportunities in helping address this
challenge.
Either you can look at companies that have a really
good water footprint so they're efficient in their water use
in their operations,
or you can look at companies that are providing water
purification solutions to the market,
and these will mean different things for sustainability for you.
Now, what I would say is either or,
but really, it could be an end,
so you could look at both these two sets of
investment philosophies,
strategies, companies in the same portfolio.
Or you could look at the same company from both
lenses,
but This is why you know there are no good
or bad things.
There's few things that are black or white in our
in our world and it's the same thing to answer
the question.
What's a sustainable company,
right? So I mean essentially it sounds like what you're
saying is a lot of it has to do with
an investors,
almost what fits their own objective.
'cause which is the benefit and the challenge I assume
of investing sustainably.
It's almost what matters to you and then you start
looking into companies looking for like use it as as
an example,
they're water footprint. So it's about the investor doing a
little bit of research on his or her own correct?
OK, so let's I wanna talk about ratings with you
because anybody who follows the markets knows that there are
ratings of every company.
There's credit ratings. There's ratings on you,
know, every facet of what we do when it comes
to investing.
Are there ratings for sustainable investing companies which I imagine
there are?
And how does it actually work?
How and how should we as investors think about using
them?
Sure,
so I mean, first, I'll say you're so right,
it's all about your objectives.
We talk about investment objectives here and sustainability objectives are
tied into the investment objectives and I think we're going
to touch more on this question in our next video
series here. But to answer your question on ratings more
directly,
so yes, there are multiple what are called environmental,
social and governance or ESG ratings out there by credible
data providers.
We often actually hear clients say,
you know, tell me whether the companies are our
own,
have a good ESG score or rating,
and that there there's two ways of thinking about this.
So firstly. These ratings exist.
Data providers go out to all companies,
all issuers out there in the world.
We're looking at 10s of thousands and they
look at what are their policies and practices on a
variety of sustainability metrics.
Sometimes they'll look at something like 500 plus different indicators,
keep different input points, and then they'll roll that up
into a single score.
Now these ratings are often helpful if you are looking
at a universe of 12,000 issuers and you want a
starting point essentially to how do you narrow that down?
Now, once you have narrowed it down somewhat,
we would argue that ratings are very helpful as a
starting point.
As an input point as a way to tell you
how am I doing.
But they're not an end all and be all so
really what's often important is to look not just kind
of what's the headline score?
How am I doing, but also to look at what
are the underlying things.
So if you know water in this example is the
thing that drives the business of a
company and its financial performance,
maybe we should be looking at that more specifically and
not just broadly the
headline rating. So we would say about scores is that
they're helpful.
They exist. You know we have our own methodologies how
to think about them,
but but they're important to be considered in the broader
context of analysis.
So in other words, do your homework.
Yes, or talk to a financial advisor.
There you go because he or she would really be
able to get down to the details with you and
find out what your objectives are and then you can
have a conversation about where you can invest sustainably.
And that's I mean, and that's why we're here
exactly. OK, good. So here's the next question,
and this is really about today's
focus, is how do I know if sustainable investing
makes a difference?
Does it make an impact because anybody who wants to
invest sustainably hopes,
I would imagine, that it's going to make the impact
of that water scarcity issue that they're concerned about,
as again, to really beat our example to death here.
But but how do I know?
Well, so we started by saying they're sustainable investing and
impact investing is a subset,
so the first thing I would say is for the
subset of strategies that are impact investing strategies that have
this.
Objective their objective. In addition to financial performance,
is also to measure the change that they hope to
to produce in the world.
So how do I know?
I mean, looking at these impact strategies,
that's where we think that there's true positive changes.
That is additive. What does that mean?
It means because of my additional marginal dollars going into
this investment strategy.
That's why we're seeing this positive change.
It's it's the changes attributed to me as an investor,
companies, all enterprises. Have a positive or a negative impact
in the world.
So what we look for is investors is really this
attribution back to me now that's impact,
but what about broad sustainable strategies?
What's the point is I've been asked sometimes of having
investing in a in a strategy in liquid markets where
you cannot really attribute the change that the large companies
making its operations to my marginal dollars.
What's the point of even holding those sustainable investments?
It's a very good question,
right? It's a great question.
Also, I would say two things,
one. There's a performance in a portfolio construction reason and
we'll come back to that in the next video,
but that's an important part of the value proposition here.
In terms of sustainability, we would also say for investors
who are coming in to this broad,
sustainable investing strategies that are investing in things like green
bonds or companies that are best in class on sustainability.
What they're doing is they're having a positive
signaling effect to the market.
In other words, they're saying.
As these assets are growing in strategies that are sustainability
focused,
companies need to understand that sustainability matters to how they're
viewed by investors and hopefully down the line.
This may have a positive impact on their cost of
capital.
How cheap or expensive it is for them to keep
raising assets from the market.
Sorry, raising capital from the market and growing,
but even in the near term we would expect the
signaling effect is almost like you're part of this rising
tide that lifts all boats and and that we think
is a benefit from a sustainability.
Perspective, in addition to the financial performance potential,
benefit
exactly, and that's something that I know in the past
we've spoken about when we've done various surveys from UBS
to to clients and investors where we can see clearly
that sustainable investing and impact investing is important to many
clients more than some might even imagine,
because I think a lot of folks out there and
you can correct me if I'm wrong.
Think sustainable investing and impact investing is a kind of
a new concept,
but it really has been around for a very long
time and is only gotten more.
Popular in conversations and probably through social media and conversations
like you're having with many of our advisors and our
clients and investors alike.
So very interesting stuff. And but here's the here's another
question for you.
How does someone? How does an investor identify sustainable or
impact strategies that are not authentic about sustainability?
That's because you gave me the tools on how to
look for ones that do invest sustainably and meet my
objectives.
What about the ones that don't?
How do I identify those?
I mean, that's the challenge,
especially as sustainable investing is mainstreaming and it's difficult to
identify those investment strategies that are just looking at sustainability
as tools to use your same word.
But where sustainability is not driving instrument selection,
what we would say is I mean it's important to
look at what the intent of the investment strategy is
and whether it's articulating some sort of sustainability outcomes or
objectives as part of it.
And it's very important to also look at methodologies to
make sure that what you,
your objectives are specifically, are aligned broadly,
at least with the methodology with the approach that whoever
that portfolio manager or investment strategy is.
Applying to earn hopefully well deserved ESG label.
But sometimes it's not well deserved and so we would
say kind of doing homework.
Understanding what your priorities are and then understanding the nuances
of all of the ways in which sustainability can come
into investment decision making and seeing if there's a match.
And if that match is authentic.
Yeah, Amantia thank you and I know that over
the course of the next three episodes,
we're going to talk about sustainable investing.
In practice, we're going to talk about performance because certainly
as an investor,
that's. Something that you really want from a strategy is
that it performs well and also the will also talk
about is sustainable investing right for me?
So those are really good topics.
I'm looking forward to chatting about those with you,
so thanks for stopping in today.
This is very fun. I look forward to the rest
of these conversations.
Yeah me too. Thanks so much.
And for those of you who are watching,
make sure to come back for Part 2 and 3
and 4.
Of course over the next couple of weeks and
Amantia will be sitting with me yet again for those.
And for more information on what we've spoken about today,
there's a website. UBS.com/sustainable-investing
Lots of content up there from UBS
and make sure to follow us on social media,
LinkedIn, Facebook, Instagram, Twitter and all of our episodes of
this show
UBS Trending are on demand on our website or on
the UBS YouTube channel and as Amantia pointed out,
if you have questions about your own portfolio or how
you might want to be investing sustainably,
talk to a financial advisor.
Let them know what your objectives are about how you're
investing,
and what that means to you to be sustainable and
in making an impact.
And then they'll find the right strategies for you that
fit in your portfolio framework.
Until next time I'm Anthony Pastore,
we hope you have a great day.
Remember to keep your eyes on what's trending.
We'll see you soon.