The Role for Asset Managers and Financial Institutions

The following is a guest post by Suni Harford, President of UBS Asset Management and UBS Group Executive Board Sponsor for Sustainability and Impact.

When we bring together voices from across the financial services industry to exchange ideas, to challenge each other and to articulate a common vision for what the future could look like, that’s incredibly powerful. There is no shortage of fast-moving trends shaping our industry. Right at the top of that list are open questions about our shared role and responsibilities when it comes to fostering a more sustainable world.

Investor, shareholder, client and social interest in this topic is intensifying with each passing day. As the world’s eyes turned to Glasgow for the kick-off of the COP 26 meeting, it only added to the timeliness for additional discussions around what’s already a topic of growing urgency.

Here, I’d like to share some thoughts about what I see is, and what is not, our industry’s role in supporting the transition to a more sustainable world an outline for which I will present in four parts.

But before we talk about the role of financial institutions in this effort, it would probably be helpful for us to first agree on a common definition of sustainability, at least for the purposes of this discussion.

There are 17 UN Sustainable Development Goals and each of them means different things to different people. I believe that point captures one of the primary issues we face in today’s world: the issue of interpretation.

I remember when paper bags at the supermarket, or houses made of wood, were considered harmful to the environment. When UBS announced our offices were going to stop using paper cups, and so employees needed to bring their own mugs and bowls to the office, this was good for the environment, right?  Except that for every employee email I got praising the decision, I got one that shamed us for the increased amount of water needed to hand wash each utensil every day. It’s all in the interpretation, because what is sustainable to one person is not necessarily sustainable to the next.

For our industry, this was an issue historically answered with ‘appropriate disclosure’ and underpinned by common data or standards. For my part, suffice it to say that while climate is topical, it’s not the only pillar of a comprehensive sustainability strategy.

Today, I will focus my comments on decarbonization within the E in ESG, noting that limiting the discussion to Net Zero still provides ample room for debate around the role of financial institutions.

One thing is clear: despite the progress, and the huge ambition that I see across our industry, there will always be those who say it is not enough. Twelve months or so ago, Net Zero Commitments were new and bold, and the world applauded that companies understood the issue and the role they needed to play. Within six months, Net Zero by 2050 wasn’t enough, the world wanted interim targets. And some three months after that, science-based targets have become requisite, i.e. a 50% reduction in nine years. I wonder if all of the 2,000+ companies who have made a Net Zero Commitment in the past year would do so today given the downside attached to such a well-meaning effort in terms of reputation, lawsuit or regulatory inquiry?

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The Role for Asset Managers and Financial Institutions

I think of the role for asset managers and financial institutions in four parts:

1. To help our clients
2. To mobilize capital
3. To engage with the firms in which we invest; and
4. To collaborate with others to bring change about more quickly

Part I: To help our clients

Part I is what I see as our primary responsibility: to raise awareness of and help our clients manage the sustainability risks in their portfolios. This enables them to make informed decisions about their investments – and is fundamentally different from us telling them what the objectives of their portfolios should be.

Our clients have many objectives to weigh; financial return and social return are just the tips of their respective icebergs. I do not believe that it is our place to impose our values on our clients. Whether a small organization or a large multinational company, businesses are run based on a culture of their choosing. Our job is to provide them with the choice they seek to effect the change they want to see. Our paramount obligation and our fiduciary duty must be to deliver to our clients what we say we will – and to ensure that they understand how we do it and have full transparency around our performance against those deliverables. I believe that we can – and do – achieve a great deal if we focus on educating, sharing information, pushing for transparency and more robust data. And, importantly, by providing the choice that our clients need to build sustainable portfolios that meet their objectives.

Part II: To mobilize capital

We have the responsibility to mobilize capital in all its forms. The transition to a lower carbon economy requires some $3.5 trillion of investment per year for the next decade. To put that in perspective, there are only four countries in the world with an annual GDP that exceeds that amount. The scale of the undertaking is enormous, and it requires us to move both public and private markets to action. That can sound daunting, but there’s plenty to be encouraged about.

For starters, governments are focused on building back more sustainably following the pandemic. You only have to look to the Biden Administration’s policy agenda to gauge the direction of travel: re-joining the Paris agreement; a climate plan that still appears to be among the most ambitious ever proposed; a massive multi-trillion infrastructure upgrade; underpinned by an acceleration of the shift to new, cleaner energy sources; and public investment programs with an increased focus on sustainability. For our industry, those kinds of paradigm-shifting initiatives present tremendous opportunities to engage with our clients, to position them to benefit from wide-scale change, and to unlock the capital necessary to fuel multi-decade transformation.

UBS’s most recent quarterly Investor Sentiment survey of high-net-worth investors also shows that investors are craving opportunities to put their capital to work in sustainable ways. Two-thirds of investors told us that sustainability is highly important to their portfolio performance. That’s the shot – here’s the chaser: 78% of investors believe sustainability will maximize their returns. It’s not just about aligning values with investments anymore. Rational investors, who are first and foremost looking to increase their returns, increasingly believe that sustainability offers greater upside than conventional investing. Our efforts at education appear to be working!

Our survey also found that, while the pace of inflows slowed in the third quarter of 2021, inflows into Sustainable Investment (SI) funds still outpaced all flows. This is important, as this is what will drive the shift in capital: investors.

But, like everything, there’s no ‘one-size-fits-all’ approach. When I say we need to mobilize capital, I mean in all its forms. I get worried when we focus so much time and attention on a specific taxonomy. Beyond the fact that we have little hope of taxonomy alignment across various countries or regions, is it really just Article 8 or 9 funds that mobilize capital to a lower carbon world? Given the monumental task ahead, isn’t there value in having Article 6 funds? Or other funds that don’t meet the reporting criteria?

To make it harder, the assortment of sustainable funds is shifting right in front of our eyes. Morningstar’s third-quarter Sustainable Fund Flows Report found that reclassification of activity has led to an increase of sustainable funds from 3,730 at the end of June to 7,486 at the end of September. Notably, a large number of funds that used to be classified as sustainable, no longer qualify.

The regulatory and legislative agenda is also rapidly changing. For those not counting, there were 550 rules and regulations published in the Sustainable Investment space in 2020 alone.

And what of the speed with which this market is changing? With new data and greater access come new metrics and better definitions. And with that comes opportunities for new structures, new investments, and new technology.

We surely need regulation, but it must be flexible enough to keep up with the pace of change. We must be very careful about drawing too fine a point on the definitions of what is, and what is not, sustainable today, lest we stifle much-needed innovation tomorrow.

Part III: To engage with the firms in which we invest

As stewards for our clients’ assets, we have a critical role to play engaging with the companies in which we invest. Investors have a powerful voice, provided they have a seat at the table. Yet, we continue to face daily calls to divest – as do many of our clients. I caution that the ‘exclusion approach’, while appropriate in some circumstances, is not likely to deliver the quantum change those calling for divestment want to see.

What happens when no large asset managers or public companies own fossil fuel stocks? Do we really believe that no one will step in and provide the capital they need? Wouldn’t we rather be there with these companies to help them value their transition, identify opportunities to monetize, and encourage their business model shifts? We need them to invest in new products and new processes and, together, we need to show them the value of those investments.

Part IV: To collaborate with others to bring change about more quickly

Finally, we need to engage collaboratively with stakeholders and drive multi-party dialogue.

UBS has been at the forefront of sustainable finance for nearly three decades: we launched our first sustainable fund in 1996. The cornerstone of our investing approach is engagement and stewardship, so we are well established in what we believe is fundamental to any sustainable investing approach. UBS is the world’s largest manager of private wealth, and we have made sustainable investment our preferred solution for private clients globally. We set net-zero ambitions for our own footprint in 2004. Today, sustainability is at the core of our firm’s purpose and, like many of you, we have committed to total net-zero carbon emissions by 2050.

I’m proud of that – proud that we’ve been out in front speaking with our clients, and with our public and private sector stakeholders, for many years about our responsibility, and our opportunity, as a company and as an industry. And yet, we report that 35% of our assets in scope of the Net Zero Asset Managers ambition are initially aligned with Net Zero. That number is only 20% if we include assets that fall out of scope.

Many may think the ambition level of our industry is not enough. I don’t disagree, but, at UBS, our substantial index business cannot be aligned until we have alternate, low carbon benchmarks that can then be approved by our clients. There is currently no recognized methodology for net zero-aligned investing for our hedge funds, money market, sovereign or municipal issuers.

I am thrilled to see us continue to welcome additional signatories to the Net Zero Asset Managers Initiative, taking us currently to 220 strong. As an industry, we have a long way to go and we know that each of our efforts are not, and never will be, nearly impactful enough on our own. We can leverage the power of our roles as natural connectors of market participants to help facilitate the exchange of views and perspectives, uncovering blind spots along the way.

Collectives like the Net Zero Banking Alliance and the Net Zero Asset Managers Initiative play a critical role because, in many areas today, there is simply no way to measure the sustainability impact of certain asset classes. Progress will require the industry to develop completely new methodologies before we can even begin to transition those investments. Collaboration needs to go beyond our industry peers to include other interested stakeholders – governments, regulators and NGOs.

The $60-plus trillion required to deliver the Sustainable Development Goals (SDGs) means that we need to encourage as many different voices as possible to join our conversations because, while our industry plays a key role, this is not an issue we can solve on our own. We need policymakers and governments.

In particular, we need them to foster alignment toward a global framework for sustainability reporting, and one that encourages and provides the flexibility for ongoing innovation. We also need governments to be more creative and more forceful in incenting change across all sectors of the economy, so that asset managers – and those we invest in – have clarity on policies, as well as access to the data we need to make informed decisions. Only then can our industry reach its full potential as conveners across the financial ecosystem.

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So where does that leave us?

I say it leaves us standing together, with huge amounts of energy (pardon the pun!) stored up for what will be a grueling marathon.

For UBS, our ambition is to help create the global ecosystem for investing – where thought leadership is impactful, people and ideas are connected, and opportunities are brought to life. We want all of our clients to benefit from, and be a part of, this ecosystem. We can then make this the norm and do it at scale. I know many of you feel the same way about your organizations – so let’s do it.

If we know one thing about this industry, competition breeds innovation, which in turn generates new growth, new products and new markets. We need to encourage all forms of positive behavior if we are going to tackle big issues like climate change and help companies transition to a lower carbon world.

Commitments to net zero and the global transition should always be welcomed. The important things we must continue to look for are science-based targets that firms can be measured against; regular and transparent progress reports; and the right governance and implementation plans to ensure companies deliver on their commitments.

Asset managers can help achieve net zero, or be blamed for not achieving it. In many ways, the choice is ours. The good news is that many of us are at the table, and there’s plenty of room for more. We can influence without imposing. We can set a pace that balances urgency with the understanding that some things need to move at their own speed, to ensure that we don’t lose key players along the way. And we can continue to serve all of our clients’ best interests by playing our part in helping today’s investors understand the choices they can make to leave a better world for the next generation.

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Suni Harford is President, UBS Asset Management and UBS Group Executive Board Sponsor for Sustainability and Impact.

These remarks were adapted from Suni’s presentation at SIFMA’s 2021 Annual Meeting. Register now to watch this session and more; available on demand through December 2, 2021. Please also join us on December 14 for GFMA’s Annual Global Capital Markets Sustainable Finance Virtual Conference.

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