Electric vehicles are part of a decarbonization trend UBS is watching. This Go Ultra Low Mitsubishi Outlander PHEV being charged on a street in London can cost as little as 2 pence (2.5 cents) per mile to run and some electric cars and vans have a range of up to 700 miles.
Miles Willis / Stringer/Getty ImagesMark Haefele, chief investment officer at UBS Global Wealth Management, recalls when he began to learn how investors such as Sir Ronald Cohen invested to make a social or environmental impact while still earning a financial return at the World Economic Forum in Davos, Switzerland, in the mid-2000s.
At the time, most impact investing transactions in the private markets were in the neighborhood of US$1 million to US$3 million—relatively small for a big wealth management firm to consider. Haefele began thinking about how UBS could make its size work for clients, while addressing the world’s social and environmental challenges—to “find a way to put some zeros behind those initiatives,” he says.
By April 2016, UBS closed the US$471 million Oncology Impact Fund, a vehicle managed by U.S. venture firm MPM Capital, that aimed to accelerate cures for cancer by investing in early stage therapies. The fund also financed grants for academic cancer therapy research and access to cancer care in developing companies through a percentage of the manager performance fee and 1% of royalties on any drugs that came to market.
The fund was UBS’s first major step in what became a journey to raise funds from clients to address a range of social and environmental goals, while at the same time earning them a decent return.
By the second half of 2020, more than a year ahead of schedule, the wealth management firm reached a self-imposed five-year goal of raising US$5 billion to fund investments that specifically address the United Nations Sustainable Development Goals (SDGs).
When the US$5 billion goal was declared in January 2017, it was considered a “bold commitment,” Haefele says, adding, “there were people in the business who were concerned about putting out targets like that.”
Making and Meeting a Goal
Creating an ambitious target meant UBS was going to have to come up with a pipeline of investments that could produce market-rate returns and impact. But as the world’s largest wealth manager, declaring a commitment at that level put asset management firms and other solution providers on notice that they should start coming up with products.
“I like to think we had a positive impact on increasing the number of solutions, and solution providers who were doing something like this,” Haefele says.
What UBS was looking for, too, were solutions that could provide measurable results against specific environmental and social goals—not simply to invest in good companies with good intentions or even the best environmental, social, and governance (ESG) practices.
While these kinds of solutions are most easily met in the private markets, where, for example, a private equity fund could be specifically designed to invest in renewable power, UBS knew that to scale up the firm would need to find solutions in the public markets as well.
Shareholder Activism
In January 2018, UBS announced it had created a 100% sustainable cross-asset strategic asset allocation portfolio, meaning clients could invest 100% of their assets in both stocks and bonds, and in both public and private markets.
For the public markets, it began offering public mutual funds that allowed for shareholder engagement. That year, the U.S. firm Federated Hermes developed an equity strategy that invests in companies that it believes it can coax toward making changes that will address a specific U.N. SDG; a year later, it developed a high-yield credit fund with the same objective.
While there are 17 broad goals, such as “no poverty” and “clean water and sanitation,” there are also 169 underlying targets underneath those goals that can be addressed, says Eoin Murray, head of investment at Federated Hermes. Of those 169, 42 are “investable,” Murray says.
As with any mutual fund, Federated Hermes has performance targets it seeks to meet, but the purpose of the SDG funds was to also include engagement targets. “A massive part of our job is to make sure UBS and its clients are comfortable with the progress made toward achieving those engagement goals,” he says.
The firm gives itself three years to move a company in the right direction by working with executives and other top managers, as well as the board. An example is Alliant Energy, an integrated utility company that supplies electricity and natural gas to retail and wholesale customers in the U.S. When Federated Hermes invested in the firm, it believed Alliant’s full potential for tapping a variety of renewable energy sources was not being “sufficiently recognized and valued by the market.”
Today the company is on track to increase its renewable energy capacity by 400% by 2023, and to reduce its coal capacity by 36%, according to the asset manager.
The notion of shareholder activism may seem a little strange in the bond markets, however, where bondholders are actually lenders, not owners, of companies, and they don’t have a vote at the annual shareholder meeting, Murray says.
While this distinction is significant during times of corporate distress, most of the time the interests of both shareholders and bondholders are aligned—they both want the company to grow and, in this case, realize certain impact goals, he says.
The availability of these and other public funds helped propel UBS toward its US$5 billion goal. As of the end of 2020, 61% of impact-related assets were invested in public funds, while 39% were invested in private vehicles.
What Lies Ahead
Last year, UBS announced it would recommend sustainable investing options above traditional investments to its clients. With sustainable investing now at its core, the need for the wealth manager to set lofty targets isn’t as urgent.
Moving forward, the firm will focus on how to provide advice to clients on how to meet their own specific sustainability goals, showing them how their portfolio scores, for instance, against certain targets and how they can shift it to better meet their goals.
They will also highlight trends that are getting accelerated because of greater global awareness of pressing issues, from climate change to health care to food scarcity. “Things like electric transportation and plant-based meat,” Haefele says.
“People understand they have to, as as part of their regular investment process, understand sustainability factors as governments pay more attention,” Haefele says. “But more and more, everybody realizes this is mainstream, and that’s why it’s so exciting to take this to the next level.”
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Future Returns: How UBS Surpassed a $5 Billion Impact Goal - Barron's
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