Schultz, 25 Jan 2018: https://goo.gl/kU7g4T
To UBS Wealth Management, the $5 trillion to $7 trillion annual cost of addressing the United Nations’ Sustainable Development Goals, or SDGs, can only be met with a huge boost in private capital. Public monies are meeting only a fraction of this need.
Many wealthy investors have already taken up the challenge as the concept of investing to reach social and environmental goals while earning a market rate-of-return increasingly gains traction. The size of the impact investing market to date is unclear, although the Global Impact Investing Network, or GIIN, says $114 billion is a “reasonable floor” based on its 2016 survey of 209 leading impact investors.
But getting to the level of funds “people and the planet” need demands more kinds of investment options to appeal to a greater variety of investors, UBS argues in a white paper delivered this week at the World Economic Forum in Davos.
To the GIIN, the U.N.’s “incredibly ambitious” goals require all sectors of society to step up to the challenge, says Amit Bouri, the group’s CEO. But Bouri agrees that the “big opportunity that’s on the table” is to “mobilize private investment capital to advance progress toward achievement of the SDGs.”
UBS is doing its part to push this agenda in 2018 by offering clients a 100% sustainable investing cross-asset strategic asset allocation portfolio. The offering includes high-quality bonds issued by the World Bank, as well as other forms of securities. In the future, UBS hopes to offer portfolios that include private stock and bond options as well.
One of the key innovations of the sustainable portfolios is the inclusion of bonds issued by multilateral development banks (MDBs) like the World Bank, which normally are bought almost entirely by institutional investors. That’s because MDB bonds aren’t generally available for sale in the size or maturity that appeal to private investors, the firm says. UBS points out that its clients had only invested $432 million in MDB bonds as of last October.
The banks “aren’t used to structuring things for private clients,” says Mark Haefele, global chief investment officer at UBS Wealth Management.
UBS argues that private clients would invest more in MDB debt by the World Bank and others institutions that fund efforts to help societies across the globe (like the Asian Development Bank or the Inter-American Development Bank) if they had more access to these bonds and if they knew how likely they are “to match U.S. Treasuries’ expected financial returns over a long-term investment horizon, while also generating societal returns.”
Bonds issued by the World Bank’s International Bank for Reconstruction and Development, for instance, have the highest triple-A rating from Standard & Poor’s Corp. and yield 0.10 to 0.20 percentage points more than comparable Treasury securities, the firm says.
The 100% sustainable portfolio offering also includes an unusual strategy to nudge publicly listed companies to act in society’s interest. The approach follows success by the Vanguard Group and BlackRock, among other shareholders, last May to push Exxon Mobil Corp. to measure how climate regulations will affect their business.
To bring this strategy to its clients, UBS is working with Hermes Investment Management to create what it calls a “shareholder engagement strategy.” The idea is to work with small and mid-sized companies “not in a hostile, hijack the annual meeting way,” Haefele says, but in a way that helps companies learn what other firms have done to do business more responsibly.
Moving companies in this direction could lead to “clear SDG outcomes,” UBS says.
UBS clients invested about $1.2 billion in one of three 100% sustainable multi-asset portfolios available when the strategy launched in early January. The portfolios, designed to perform similarly to a conventional portfolio, have market risks ranging from less-aggressive to more aggressive, to appeal to a range of investor risk appetite.
“This is not philanthropy, this is about achieving investment returns, but to do it with companies that are more sustainable,” Haefele says.
This effort to infuse impact investing and sustainable investing across a portfolio is a huge contribution, one that sidesteps the business-as-usual practice of adding one or two sustainable investments on to a conventional array of holdings, says Bouri.
“To really build a more sustainable world, we have to think how do we mobilize all of our assets ranging from cash through private investments to public investments to be part of the solution,” he says.
For more targeted impact, UBS is also working with clients to understand which specific U.N. SDGs they care about. Some examples of these goals: no poverty; good health and well-being; clean water and sanitation; and affordable and clean energy. By understanding which of the SDGs are most important to a specific client, UBS advisors can help a client identify individual stocks or funds that best match their sustainability preferences, Haefele says.
“It’s kind of the opposite of an exclusion strategy,” he adds, referring to the “no fossil fuels,” “no defense stocks” approach taken by many in the investment industry when socially responsible investing first took root.