This month, UBS made a groundbreaking move, announcing that it would recommend sustainable investing over traditional investing to clients around the world. The big Swiss bank would even recommend it to retirement plan clients—a move that raised some eyebrows, given that the U.S. Labor Department is weighing a rule that would limit environmental, social, and corporate governance, or ESG, options in such plans.
Yet the decision by UBS (ticker: UBS) is likely to be followed by other wealth managers, some experts say. “This is a great first-mover advantage in the chess match of ESG investing,” says Jeff Gitterman of Gitterman Wealth Management, which has offices in Manhattan and New Jersey.
“It’s a game-changer like Larry Fink’s statement” in 2018, in which the BlackRock CEO said that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
For UBS, it’s also good business.
“I wholeheartedly believe this makes the client stickier,” says Glenn Schorr, who covers wealth management for Evercore ISI. “An average dollar in a mutual fund these days lasts a year and a half. The duration of a dollar in a wealth-management account is measured in decades.” Eventually, that will translate into stronger revenue, although other companies already have substantial sustainable practices.
In 2020’s first half, asset flows into sustainable investment funds hit $1 trillion-plus, matching the total for all of 2019, and easily beating 2018’s $600 billion, says UBS. And sustainable investments have outpaced the market. UBS says that 72% of such funds were in the top half of their Morningstar categories in the first half. Similarly, MSCI’s “ESG Leaders” indexes outpaced conventional indexes in that period.
“ The business was ready, our clients were ready, and people were ready to start implementing the investment case we’ve been making for some time. ”
Clients want socially-conscious investments; 62% of family offices surveyed by UBS believe that “utilizing impact investing is important for their legacy.” So, the bank’s wealth managers will be quick to discuss sustainable investing with clients, rather than waiting for them to raise the subject.
Since the 2008 financial crisis, UBS has transformed itself into the world’s largest wealth manager, while cutting exposure to cyclical and capital-intensive investment banking.
Of its $2.6 trillion under management, $488 billion is in sustainable investments. The bank has burnished its own sustainability cred by buying carbon offsets for business travel. And it’s been asking potential third-party asset managers—those it makes available to clients on the UBS platform—about diversity and inclusion practices.
UBS’ Sustainable Portfolio
Here is the asset allocation for a taxable investor who is moderately aggressive. UBS' model sustainable portfolios range from all fixed-income to all equity.
Source: UBS
The Covid-19 pandemic and the woes it’s cast a brighter light on—income and racial inequality among them—have raised environmental, social, and governance investing as a way to reduce risk and to tap into companies grappling with these issues. The time had come. The technology had improved, and UBS had a full suite of potential ESG investments “across all asset classes,” says Andrew Lee, head of sustainable and impact investing at UBS Global Wealth Management.
The company’s expanded fixed-income options now include portfolios through which fund managers can engage with issuers to improve ESG. And there are new options in private equity and private real-estate markets. “The business was ready, our clients were ready, and people were ready to start implementing the investment case we’ve been making for some time,” says Lee.
The table on this page shows a typical account for a moderately aggressive taxable investor. That person’s fixed-income portion might include multilateral development bank bonds, such as those issued by the World Bank; municipal bonds that fund projects with social and environmental objectives; corporate green bonds that finance environmental projects; bonds issued by companies that simply manage sustainability well, and “ESG engagement high-yield bonds,” with which fund managers actively work with issuers to improve environmental, social, and governance scores. Alternatives, such as sustainable infrastructure, real estate, and private-equity holdings are available.
UBS has said it will also recommend sustainable investments to its 401(k) clients, although this is a minuscule part of its business. The bank doesn’t regard its guidance as conflicting with the Labor Department’s unpopular proposal that would discourage 401(k) and other qualified retirement plans from offering ESG funds. That is because it believes, among other things, that sustainable funds can outperform traditional investments and that ESG is a critical tool to manage risk.
The move may be copied by wealth managers like Bank of America Merrill Lynch, DWS, and Morgan Stanley, which see sustainable investing as critical to growth, analysts say. Says Ian Simm, CEO of Impax Asset Management, which has the Pax World funds: “I would expect others will follow.” A DWS spokesperson observes: “This reality is not new to us, and frankly, we are glad to see others taking note.” BAML and Morgan Stanley weren’t immediately available to comment.
Will UBS keep its first-mover advantage? Ultimately, as with all investments, it “will need to show performance first,” says Johann Scholtz, a Morningstar analyst. “The winners will still be the players that can deliver the returns demanded by their clients, preferably in a sustainable way.”
Write to Leslie P. Norton at leslie.norton@barrons.com
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