Investors act to capture resilient opportunities

Below are the questions and my answers, as published in Raconteur.

From your observations, what does sustainability mean to most investors?

In recent years we have seen a paradigm shift - with the move of sustainability into the mainstream, for business, for finance and for society. In my mind, that shift has been driven by one thing: transparency. It affects what individuals buy and how we travel, and now how we invest money. Yet it’s very clear to me that sustainability means different things to different people; you only need to look at the United Nations’ 17 Sustainable Development Goals, which set out a broad range of essential areas to improve - right from tackling poverty, hunger and educational barriers to improving consumption habits and environmental impact.

We spend a lot of time talking to managers to unearth the risks and opportunities in their businesses, and to support them in making deeper changes

What does this mean for how they approach investments?

Many investors start by identifying their particular priorities. Do they want to see emissions cut in their portfolio companies, or exclusive use of renewable energy? Do they want better use of water and resources, and improved recycling? Do they want elimination of bad practices throughout the supply chain, stopping of corruption, better diversity and fairer executive pay? Driving these priorities means that businesses will focus on thinking and acting in all these areas and beyond with the long term in mind. For me it is those two words - long term - which are critical.

How can investors ensure they are succeeding on sustainability?

When it comes to sustainable investing, there’s been a tendency for investors to look backwards and rely on ESG scores and ratings from the very many providers out there in the market. These can be useful as a starting point, but we think it’s much more important to take a forward looking view of where the business is going in order to improve the resilience of portfolios without compromising long-term risk-adjusted returns.

How does UBS ensure its clients have resilient portfolios?

We spend a lot of time talking to portfolio companies’ managers, firstly to unearth where the risks and opportunities lie in their businesses, but then equally to support them in making deeper changes. We partner with them to transition their business models. One example is the work of our asset management division. It has engaged extensively with major energy firms, because while these businesses have clearly been a big part of the climate problem, we know that with their innovation skills they can also build the solutions.

Can you characterise a typical discussion between UBS and a portfolio company?

When we engage with companies, we are very clear: we explain that we’ll work with them and support them as they transition their business models, but if insufficient progress is made then we’ll no longer continue to invest. We’re not alone in this endeavour; many of the largest investors in the world are also taking the same approach, as are growing numbers of private investors.

What’s the impact of this stance on business practices?

We’ve started to see more companies set ambitious net-zero targets, for example, and agreeing to align executive pay to them. Companies are recognising the need for transparency, to show investors that their business models reflect not only longterm risks, but also the durable opportunities. In the market today, we can see that the companies successfully attracting capital are those able to show a clear and long-term plan that is being well executed.

Disclaimer: The value of investments may fall as well as rise and you may not get back the amount you originally invested.