ESG Integration and Values-Based Investment

How do environmental, social and governance (ESG) criteria impact investment decisions? Do these criteria still count in times of crisis and if so, how much so? Professor Vanina Farber and Jaume Iglésies delve into sustainability investing as it stands today.

Professor Farber defines SI as “an investment strategy that incorporates ESG considerations into the investment decision. We want to know the impact of these criteria on your portfolio.”

To begin the webinar, Vanina Farber asks participants if they would like their retirement/pension fund to use a sustainable investing strategy. Over half of participants say “yes, because it will likely enhance returns in the long term.”

Commenting on this, Jaume Iglésies finds that while very advanced, this thinking isn’t yet reflected by the average client.

“But we’ve seen a huge jump in the last ten years from ESG being somewhat marginal to now being found all over the place.”

At UBS, sustainability investing needs to generate more than financial performance. There’s a growing number of clients who want their investments to reflect certain values or considerations that are important to them, be it climate change, gender equality or social inequality.

“Sustainability investing is certainly not a niche market anymore, with more than a third of all investing today being considered sustainability investing,” explains Jaume Iglésies.

He says it has become standard practice for requests for proposals (RFPs) from investors to include questions about sustainable investing: is it part of what you do as a financial institution? How you do it? And, demonstrating your track record.

“In most western European countries, you can’t get around RFPs from a large investor without addressing ESG topics,” says Jaume Iglésies.

In categorizing UBS clients into three broad groups based on how they react to sustainability investing, Iglésies shares how 15-25% of clients are in the “Yes, finally!” category i.e. they are actively seeking sustainability investing opportunities and have been waiting for a financial institution to put forward the corresponding proposals.

The “Why not?” clients, according to Iglésies, are those who need to be convinced. They are open to SI if three main conditions are met: (1) performance is at least as good as conventional investing; (2) it won’t cost more to invest in SI; and (3) it’s easy to invest in SI.

“Return expectations on sustainability investing are going to be in line with conventional investing. There’s no reason to believe that it’s going to be lower. In fact, the oldest social investing index, the KLD400 has even outperformed the S&P 500 from when it was created 30 years ago.”

“Companies that have good corporate governance, good risk management, treat their employees well and have good client relationships are more likely to be sustainable – all these things seem to reward investors.” In essence, ESG performance can serve as a proxy for a well-run company.

But what’s the best way to begin the conversation with a client who has not previously been exposed to SI? Jaume Iglésies warns against the temptation to begin by trying to make an emotional connection with your client first.

“You’re going to end up having a super nice, almost intimate conversation with your client but they’re immediately going to put SI in the ‘UNICEF+’ bucket. Once that happens it’s almost impossible to have a discussion around risk, returns or diversification.”

“When I talk to relationship managers at UBS, I recommend trying to make the economic case first, explaining that this is a sound investment strategy, that has its own merits and that we believe will deliver good returns. The additional benefits will unfold naturally.”

“Clients understand that investing in a company that makes products and services that benefit society is better than investing in a coal company. Or that investing in a company that researches renewable energy is better than investing in a highly polluting oil company.”

Participants asked if applicability of ESG criteria on investments is becoming more of a trend in other parts of the world apart from Europe. Jaume Iglésies explains that there is an increasing footprint in Asia, the Americas and emerging markets.

“We like to do engagement of SI in emerging markets. You get more bang for your buck,” he says. The potential for SI is enormous in the diversity and breadth of opportunity in emerging markets but there are also more risks.

Jaume Iglésies answers a number of questions about how performance of SI is measured at UBS as well as examples of the methodology for applying ESG criteria to SI. He also makes a number of important comments on how the COVID-19 crisis has impacted SI.

In terms of key takeaways, Jaume Iglésies reminds us:

“SI is here to stay. People want to give a sense of purpose to their investments. Instruments now exist on the market to do this so we only see SI growing in the future.”

To find out more about upcoming webinars from the elea Center for Social Innovation, please visit the Center’s page here.

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