To this end, we’ve been incorporating SDGs into the investment views we share with clients since adoption of the goals in 2015, whether in sustainability-specific discussions, thematic discussions, or more general communications. We do this to highlight the need for action and the risks inherent in not tackling these problems, as well as the commercial investment opportunities that can drive progress on these issues. Beyond awareness, it is clear that more capital and credible solutions are needed to effect positive change. Engagement has long been an asset manager tool to improve corporate business performance on a variety of issues, and the SDGs had emerged as an effective frame for such engagement dialogue on sustainable development challenges and opportunities. And investors are showing increasing interest in driving real-world environmental and social change with their investment capital. We introduced our SDG Engagement concept as part of our sustainable strategic asset allocation framework back in 2018, seeking to bring these objectives together in a dedicated investment approach focused on using engagement to deliver potential positive change on SDG challenges. Today, SDG Engagement strategies in equities and fixed income represent some of the key components which are designed to deliver positive impact in public markets within these diversified portfolios. How easy is it for your asset management partners to engage on behalf of your clients as lenders, as opposed to as shareholders? Andrew Lee: Great question. Clearly bondholders, in a different position in the capital structure, may have different interests than those of equity holders. Nonetheless, the interests of these two investor types will have meaningful overlaps, especially from a long-term perspective. Both are able to utilize engagement to support their interests, but the avenues for engagement may differ. Shareholders have voting rights and a clear voice, with their primary leverage based on their power to divest and sell shares to another buyer. Bondholders, on the other hand, do not have voting rights, but are regularly asked to provide fresh capital, offering them opportunities to influence use of proceeds of the bonds and make their priorities known. If they withhold financing, companies may not always find it easy to raise alternate replacement capital. In many cases the lending proceeds may finance critical new projects, which makes it important for capital providers to take a view and make their strategic and operational priorities known. UBS has genuinely global reach. What ESG and sustainable investing trends have you seen across your markets? How do UBS and your advisors work to identify each client’s specific sustainability objectives, and tailor solutions to meet those specific objectives? Andrew Lee: The overarching trend we see across regions is that private client interest in sustainable investing continues to grow despite market volatility. We think this is motivated not only by the recognition that sustainability matters for all investments, but also by growing investor interest in driving positive change with their capital.
With regard to specific sustainable themes in focus for clients, there are more similarities overall across the globe, albeit with some identifiable regional differences. For example, clients in the Asia-Pacific region appear to be more attuned to environmental, pollution and climate issues than peers in Europe or the United States. Overall, however, private clients globally generally express common interest in the following broad areas: climate change and natural resources (including related areas like pollution and waste), with healthcare and other people issues like diversity, equity and inclusion not far behind. These themes are of interest to clients both from a “biggest risks” and “biggest opportunities” perspective. Personalizing portfolios to reflect these and other private client sustainability preferences is important given that everyone has distinct interests, which are often informed by their professional or philanthropic priorities. So tailoring can help improve portfolio fit with investor preferences and increase stickiness of capital. Yet we also aim to balance individual personalization with the potential to leverage common areas of client interest to motivate more investment into collective investment solutions at scale that can then signal or exert greater shared influence on portfolio companies toward more sustainable behavior or outcomes. When selecting investment strategies for sustainable portfolios, UBS assesses different elements of their approach, including people, process, philosophy, performance, risk and pricing. Is there a particular area that tends to pose the hardest challenge, or requires the most improvement in the industry? Andrew Lee: Impact investing strategies are some of the most exciting solutions within the asset management industry, thanks to the potential real- world social or environmental change they aim to deliver alongside competitive financial performance. Yet delivering credibly on that promise is challenging for fund managers to do properly. Significant investment of time and resources is needed to establish a rigorous and repeatable investment process that truly incorporates impact. For example, we’d expect strategies to do this throughout their lifecycle, from identifying opportunities for positive change, developing clear theory of how to drive that change through investment and active involvement, managing progress toward impact objectives, working to ensure that change is persistent, and verifying that it did in fact benefit relevant stakeholders. Clearly there’s a lot here. The Operating Principles for Impact Management provide a guide to the key elements that investors should expect from strategies positioned as impact investments. In our view, the time and resource investment by asset managers should be more than worthwhile. The global sustainability challenges we collectively face are growing, and investors increasingly express interest in having their capital drive tangible real-world change. We believe that our industry, our firm, our partners and our clients have a key role to play in working together to drive interested capital and action toward building a more just and sustainable world.
50 2021 ESG ANNUAL REPORT
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