The Challenges of Bank ESG Investment Strategy (webinar)

Key Takeaways

a broadcast welcome everyone just waiting a second for participants to join I can see atendees coming in that's great right right waiting one a few more seconds for participants to join and then we'll kick off great well everyone is still joining well welcome to this third of our webinar series for the bank governance program it's a it's a pleasure to to have everyone on this call and to have more participants joining as we go along my name is Amir Z I'm one of the co-directors of the bank governance program at the site business school University of Oxford and together with Kel Alexander who's also on this call and Dr cast gooder or our speaker today who K will introduce in a second where we are very happy to have with us talking about a very important and very timely uh Hot Topic I would say so I'm expecting a lot of um great uh discussion and insights um so this seminar today as I said about um ESG and Investments or sustainable investing um uh as as in a broader sense and um we will hear soon from from Dr cast at the moment I will hand over to the co-director K Alexander to introduce our speaker great thank you aor and uh it's pleasure to for have the third seminar in our bank governance program and at the outset I'd like to also acknowledge the helpful support of the research network of sustainable Finance here in Zurich and the Swiss banking Association uh through which we have been engaging with uh our discussions on developing seminars and uh webinars and so we're very happy today that we have Dr Caren gut with us uh who is uh has extensive experience in the area of of banking and asset management and of course uh when we talk about Asset Management we sometimes think of Black Rock and the big investment management companies but also we we tend not to focus so much on what the big banks are doing big Banks like UBS credit Swiss Barclays they have big Asset Management divisions and so we're very happy that today we can have uh carsten goler to speak with us carsten is senior investment Specialists within the UBS Asset Management division he is responsible for representing the sustainable investing capabilities of UBS to their institutional clients uh prior to joining UBS carsten worked in ubs's wealth management Division and he was there he was head of sustainable and impact investment and distribution uh before joining UBS uh carsten worked for Commerce Bank in 2011 uh he also worked with credit swis private banking in Zurich and he worked with the Boston Consulting Group so he's got a ex a lot of experience with other Banks and what they're doing in the area of investment strategy and sustainability and he's currently the senior investment uh specialist with ubvs Asset Management we're very pleased to have Carson he he has a a doctorate uh in entrepreneurship from aen University in Germany and he also has a master of science in financial engineering and marketing from the uh from the University of Bradford and also a master of science uh from leic Graduate School of management so he has immense background both educationally and in working with some of the leading international financial institutions in the area of asset management so I'll turn it over to Dr gut thank you thank you very much for these uh kind words and introduction also warm welcome from my side and uh thank you for the opportunity to be speaking about a topic that is pretty dear to me not only professionally but also from the way I believe Investments should play a role in in society so this is not only due to the fact that I have three kids who are P throughing me pretty much from morning till evening that I do more in terms of society returns we speak about that in a bit so thank you again and I would say let me give you like 15 minute introduction how I see sustainability evolving what are the drivers behind it what are the most relevant influence factors to that in the later on and we looking forward to a fruitful and active Q&A so I hope you can all see my presentation now all right so there are two parts uh to it that I want uh to show and discuss today so the first one hope you can see it now it says it's sharing okay so um theory and practice these are the two main chapters uh of uh what we will discuss today around sustainable Investments so and if we start with the theory so what is sustainable investment in general not only for UBS Asset Management so at the end of the day uh what sustainable Investments is all about on a longer term view on return and risk so we Define the risk and the return component in a broader sense and the objectives are improve risk adjusted return in the long run it actually have sort of societal return which is called the positive environmental or societal impact alongside the financial return so it's not either or it's a end at the end of the day it's also aligning values that you personally have that investor has with the assets so this is I would say the heart of sustainable Investments if you would summarize that it is Performance Plus so you have pretty much the same risk adjusted returns that you would expect from a conventional investment but you will have a societal plus and that's about it and there are various way of looking at it you see at the bottom you analyze corporates for E S and G which is often treated as a synonym for sustainability and you do not only look at corporates you also look at sovereigns at governments in order to uh evaluate what drives their sustainability return sorry sorry to interrupt um we still see your your um main the front slide okay seems like the slides are not changing I think yeah try it again we're currently just seeing the yeah first slide of the PDF you might need to share again okay try it again so here we go yes all right so there was pretty much uh the Performance Plus component what are you considering when looking at sustainability and the most important thing is uh long-term View and this is I would say the key value at when it comes to assessing Financial assets so what is driving it um at first uh said you see here uh the growth of sustainable Investments over the past couple of years and uh you see A Kar of roughly 14% per anom and this is quite uh interesting as if you take other studies that look at growth of financial assets for instance the Boston Consulting groups one or Price water Coopers wealth manage group with weth studies you will find that conventional assets they grow at a pace at a rate of 6% per anom and I said sustainable investment grow more than twice of that and this is true for pretty much every region you can see that here on the right hand side and uh I think the asset growth as such is right now predominantly driven by institutional investors and what is driving the behavior of financial uh assets or the allocation of financial assets of institutional investors it's a lot driven by regulation so what you see here on this page five is not necessarily stock markets I would love to be that the stock market it is actually the number of regulatory initiatives that deal somewhat with actually Investments or disclosures in the context of ESG you see this is a fantastic chart uh and it has impact as you have seen in the previous slide just to mention a view of the global uh regul regulatory initiatives um a lot of that is about es and it's about sustain ability and in particular it's about uh the environment so the Paris climate Accord has been in the last couple of years a major driver uh for regulatory initiatives across the board including uh the US um and uh I think this has a broad influence on what institutional investors and also banks have to do keyword here uh and ID the insurance distribution directive uh that will lead to institutional investors on Banks and asset managers and also insurance companies asking their clients do you really want to invest sustainably and this is mandatory so now we have seen what uh the Pol what policy makers want now the key question is what do private investors want without uh uh being asked by by Regulators to act in a particular way I have taken out uh here one part actually that's the UK Outlook of the UBS investor watch where UBS is asking its private clients what do you think about sustainable Investments do you want to do it and what you see here is the UK in particular is lagging behind only one fifth of the investor Bay says yes uh I really want uh to invest and actually do it I put my money where my mouth is so more than 1% of sustainable Investments uh dedicated to to ESG Investments and other countries as you see here are farther ahead and if you look at China that's a particular interesting one now uh what are the main reasons why these numbers are not even higher because if you usually ask somebody do you behave or invest sustainably or do you like sustainability then pretty much everybody will say yes but seemingly not everyone puts the money where them office and one of the key drivers you see here on page eight is that the terminology that's being used is pretty much confusing you have a multitude of different terms that are sometimes used synonymously sometimes not sometimes even different banks or asset manager use the same term in a completely different way and that's why they say if I don't understand what I do then I rather do not invest and that's the major difference between the institutional space because there you have the regulator telling you what to do and what is right or wrong but you as an individual with your own views your own values coming back to what I said in the beginning aligning the values that you personally have with your Investments that is something much more disperse and more difficult to actually Implement compared to institutional world now there's a second uh question what does sustainability mean what is sustainable I've just taken here one example of Tesla everybody knows Tesla everybody has an opinion about Tesla and I've taken two different data providers that actually analyze uh Tesla so on the left hand side you will find msci USG research with their assessment on the right hand side uh were the number two in the space sustainalytics and uh they look at sustainability from various driver levels but the conclusion is completely opposite if you would believe what uh msci is saying you would say it's a fantastic company it's uh s .1 on a scale from 0 to 10 with 10 being the best and quite the opposite when you look at soci analytics they say yeah that's uh a challenge and that is pretty much one thing that you need to consider as an individual if nobody actually somewhat says yes this is sustainable this is not these are the standards we need to apply then especially private investors say then I shy away from it then I wait until various Common Sense established around it now this was the theory a lot of problems it's growing but what can we make out of that so how can we synthesize all of these inputs into something that is actionable now we're coming to chapter two which is the practice implementation part so first of all is transparency I guess transparency is one of the most important things in sustainable Investments or ESG because you need to EST establish quite clearly what are you talking about and uh what has been established over the time is a framework of four plus two approaches how you think about sustainability when it comes to Investments and these can obviously then later be combined but but what are what is the gist of it first uh the famous been around for the longest period of time this is also quite natural for an individual investor because it tells you what lets you express what you dislike and there are two ways of expressing dislike one is based on a product so I don't like alcohol I don't like tobacco and you see already the problem talk about uh ESG or or tobacco not being good uh to to a smoker uh so probably you won't run into open doors uh so product based exclusions and Norms based it's not about what you produce but rather how you produce it so if you just take I would say uh a water purification plant and uh It produced the most fantastic uh completely energy neutral cleansed water but unfortunately you employ children to actually reduce your operating cost that would also not be considered as sustainable so what is being produced and how are goods and services being produced that's the exclusion ESG integration is a risk View and you see already uh in the mid if you look at the market size it's as big as the exclusionary dimension this is kind of uh allocating a certain value at risk a certain risk budget to ESG risk so you kind of uh distribute your uh risk budget to not only Financial Risk traditional one that where we all know how to analyze it and quantify it but also give it a bit space in terms of ESG risk and then you can think about one big esis so do I want to have one big company that is quite controverse but I think the potential future reward May compensate for it or not or it take little ones or take none now and that's also the difference now we go into one of the strategies that you predominantly find in the private investor space sustainability Focus this is about minimum standards so you set out clearly what is a minimum standard irrespective of whether not adhering to it might even reward you to a greater extent financially but you say this is what I like this is where I invest and there is the red line I don't cross it an impact Investments goes even one step further because it just does not qualify a certain assets as sustainable or not but it asks you to quantify the societal return IE just take my my water example if you have one cubic meter clean water it's great sustainable but having one cubic meter additional clean water in London as opposed to in Goa in India that makes a huge difference if you think in terms of death rates of children di cases or even sick days uh because of uh actually polluted water so quantifying that means you need just not to know what products are out there but also where they are being distributed then um the stewardship uh this is voting and engagement this is supportive uh supportive activities in order to make companies and government change over time and it's uh ultimately also you could kind of say uh that is uh invest in positive change so this is kind of parameters if you look at the top four strategies and stewardship voting engagement is is an an enabling uh Factor so what you see here I I just briefly touch upon it page 12 you see sustainability focus on the right hand side this is really what the typically private investors think about uh when they invest in a diversified portfolio from a with a sustainability Focus so it means you have the exclusions activity based you have Norms based exclusion which is called single company exclusions for instance the UN Global compact is important you have ESG ratings that need to be better compared to a certain conventional reference point on the other hand side also a better CO2 profile IE your companies in your portfolio need to emit less CO2 for what they produce last but not least there need to be a clear active engagement a stewardship component attached to it so that there are certain societal outcomes that are promoted with the assets that you're managing so how do you go about that uh from the infrastructure side obviously you need to know uh uh what the sustainability profile of a certain asset is and there is this is where research comes into play so you can buy research there are dedicated research companies like the ones we have seen for instance msci is your research or is analytics but uh this is usually just public data that is kind of being made easier accessible for an in Institutional Investor so you don't have to go through all the websites and all the sustainability reports and financial reports yourselves you can just buy it but by Nature this is always a bit backward looking and that's why in proprietary research every asset manager every wealth manager does that this is way less small amount of indicators that you're looking at but they need to have a much higher predictive validity because you will be rewarded for future returns and this is where these kind of internal assessments are geared toward you're just uh one example for a fixed income research piece and you Benchmark it you calibrate it and uh ultimately predictive validity is here uh the key the key objective and then uh aside from that you monitor risk we talked about ESG integration as a risk management tool and what I've have shown here is just an example of the in principle workings of our ESG risk dashboard so we take a multitude of data in there our own as well as third party data there are different drivers reputational risk drivers governance very important absolute ESG risk so there's a highly likelihood that for instance the mining sector something will go wrong sooner or later this uh these mishaps is this sector is much more probable than for instance uh in um in the software sector and uh this then sends out a risk signal and depending on what Strat uh you are either allowed to take one or two of those higher risk uh companies or in terms of the sustainability Focus you must not this is again this is like a sustainability Lego you have the tools you have the data but at the end of the day what you want to build this depends on your values and on your objectives but having all these tools together that is important and that makes ultimately the difference and uh last Point um that I want to make is you've seen these uh ingredients these Lego stones that you need to build something and uh I said in the beginning transparency is key and this is what we are doing now now you need to kind of synthesize everything back together and explain to investor what you have done so what you cannot do is communicate the differences between the various uh data providers so how do they assess a company you need to decide for one and then you need to communicate against that irrespective of whether your strategy at individual level is managed against a framework but consistency in the way you're showcasing what you're doing that is key and this gives you the credibility and that helps to overcome this obstacle that investors say I don't invest because I don't understand in what I buy so you see rating profile you see carbon emissions you see exclusionary Norms based as well as product based and you see even the SGS in a combined uh way and then you have again those five criterias you promise something you deliver against it and you allow a third party to judge to be the judge of whether you have done well what you promised or whether you made mistakes and this gives the credibility that ultimately you need to have in order to be successful so last word on performance uh there's always been this discussion and debate about uh is there kind of a compromise that you have to make like a tradeoff between ESG profile and financial returns so what I've done here is on this slide and I hope you can can numbers are rather small this is a onee threee and five fe uh return average of Equity Funds and bond funds across the whole morning star universe that means all uh funds that are allowed for distribution to private investors in Europe are kind of categorized into Equity us or bonds Global USD or Emerging Markets hard currency and then uh they're compared um against the conventional counterparts in exactly the same segment so gray is conventional fund red is uh the the the ESG funds and what you see one year three year five year uh you do not necessarily need to fear that sustainable Investments do underperform as on the contrary but at the end of the day and this is my closing remark before we go to the Q&A session it's Performance Plus is you should expect the same risk adjusted returns with the additional benefit the plus being a societal impact and that depends on how you build your sustainability Lego with that I am back to our moderators for the Q&A session great well thank you U Carson very much indeed for a very insightful and thoughtful uh presentation uh discussing the theory and practice of sustainable investment uh we've got some questions that are coming in but I thought I might just ask one to to kick off the discussion uh it has to do you mentioned in one of the earlier slides that regulation seems to be one of the primary drivers in the development of sustainable investment uh practices uh and we see a lot of regulatory initiatives all over the world and uh China tends to be doing a lot more than say the US for example um but nevertheless regulation is very important do you feel that there is any benefit to to having a more harmonized or harmonized International regulatory approach to sustainable investment we see now that many National authorities like the US China UK Switzerland have very you know varied approaches do you think that regulation could play a more useful role if it were more linked up or possibly more harmonized yeah this there are two hearts uh here beating now in my chest so uh when it comes to if the primary objective was to channel and allocate as fast as possible as much assets as many assets as possible to a common goal for instance let's take climate change or let let's talk about Net Zero by 2050 then yes this alignment would help a lot however when it comes uh there not the second part to it uh when every investor does pretty much exactly the same so you are hunting assets that are at some point in time rather scarce then you will have a highly probability uh high probability that you have misallocations of of assets so you will have assets prices that have nothing to do with reality they will just be inflated because every investor is hunting exactly the same assets and uh that is a challenge so um in a nutshell I like diversification I've done Investments all my life and there is one truth is the only little in against defaulting or underperforming when it comes to your investment returns is diversify you need to diversify and uh that's why I'm not uh too keen on having the Bible of sustainability right so whereever said okay this is exactly how we Define is exactly how we measure it uh just to avoid these misallocation effects so uh I rather have three or four more years where people say uh maybe I still don't know yet I need to find my way or maybe even use the asset managers the wealth managers in order to give feedback what they think because they all have different perspectives then if every sector does it in an aligned way but slightly different then the danger of uh kind of these unwanted side effects is probably a bit more mitigated uh and I think this is two or three years of more confusion well invested thank you um yes and no we I think we have a a question or coming or air would you like to uh ask a question uh yeah we have a question um we'll get to that in a second please keep them coming um let me get also one question in before we get to the audience and in particular because you mentioned it right at the beginning Carson that there's still some skepticism so you mentioned it doesn't seem to look like private investors are putting their money where their mouth is so then so this disconnect between institutional um investors and institutional products and and private investment so then the question I have is then so where does the skepticism then come from because as you also said your children are pushing you to do something for for society and in the environment so it seems like the the newer Generations are pushing the older generations to shift wealth also into into these sustainable products so so is it that we're still skeptical about the returns is it the confusion that is making us skeptical or is it the skepticism around the actual impact that we are having with these yes there there two things I believe uh that are a little obstacles on our journey to more assets from the on the private investor side invested sustainably one um is being uh this uh confusion this terminology uh topic and uh that is exacerbated or made even worse uh because the majority of advisers they are not yet uh so comfortable in advising their clients around sustainability because they're facing exactly the same uh challenge they need to somewhat side with a view on ESG on sustainability be it on the data side be it on the Norms side I mean I said if you want to say I build an sustainabil sustainability focused multi-asset portfolio which is usually the case when it comes to advisory and you need to think about do I commit myself to avoiding Alcohol Tobacco or even nuclear yeah so that that these are things where there's no standard I mean if you ask a Frenchman about the sustainability profile of nuclear energy you will get a complete different answer if you then you would ask a German or Austrian investor or a Swiss investor and that's why they don't like to g go out and say okay this is my view my dear client uh you should invest exactly like this and uh it's it's it's less uh concerns about returns because everybody has understood by now that it's probably not the worst idea to invest sustainab but sustainability but talking about it advising about it framing what sustainability means in terms of a portfolio context that is the key challenge so I don't think that the individual investor is the bottleneck I'm strong strongly believe that the client advisers are the bottleneck in not daring to advise the clients right now but this is diminishing over time it takes a lot of efforts and trainings and UBS is in the same situation we need to train train train train uh only then will you also see a pickup in the private investor space once a investor private investor has done it they see the performance they see what's happening that's uh and then then actually you see the assets flow in and the second part is also very valid point what is the actual impact so we're talking this impact bucket that you were mentioning so quantifying societal return of your Investments and this is a bit uh of a challenge because it's expensive it's it's not Mission Impossible it's actually very Mission possible but it's super expensive and uh if you I would say offload and allocate cost for impact measurement to a certain investment strategy then it will underperform so either you shy away from measuring it and that's right now still the situation for the majority of asset managers you simply don't do it you treat impact Investments like an R&D Department even like a philanthropic investment so um you just focus on those investors that say I want to advance uh even Academia in terms of how to measure societal impact and then I intentionally take uh into account that it might reduce my risk adjusted returns because of the additional cost incurred but this is not the fact not the case for the majority of investors so uh this is now now in the second part so impact Investments a client want to know about it but uh they usually don't want to pay the bill thank you yeah so let's move on to the questions from the audience there's a few coming in um so there's one question on um it asks how useful is an ESG consensus score wouldn't it nullify the usefulness of contrarian ESG view which may very well be an early warning of a particular company so essentially I'm assuming it relates to your comment on if everyone is running investing in the same companies so you everyone's looking at the same ESG scores are we not just creating essentially another problem yes exactly yeah I fully agree I mean this isly my point why I was saying um I'm not the biggest fan of having one institution saying this is right or wrong in terms of sustainability I like these uh differences are like uh diversification of views and when it comes to the risk Dash um one could also treat it in the following way and and look at it in the following way so if you have different drivers behind a certain ESG rating or ESG score outcome so it can be an absolute rating it can be a relative approach the materiality metric so how important E S and G dimensions are relatively seen in each sector to assess a certain company uh they're different then then if you take that into account and combine it and I would say three out of four input factors based on complete different views on what sustainability is and whether a company or an asset is sustainable or not and everything says it's a bad company then it's very likely a bad company but if uh like in the case of Tesla if it's uh one says it's great one says is bad you need to ultimate ly figure out what makes uh most sense and there comes into play your own proprietary research where you say I do not just want to look at what the company is doing now but I'm here to change in the future because the capital markets do not reward you for what has already been implemented what's the status quo they reward you for what is being done in the future and if your own valuation says okay it sides with Tesla let say msci so maybe that as a more predictive validity I'm not saying here that is the case but just saying assuming it so uh then you make your investment decision accordingly and follow the route of invest in positive change it will be hopefully a reward at a later time for that so diversification is key and uh asset inflation will be the result if you would follow like sheep just one just one indication how how things should play out um Carson I thought I might ask a question having to do with the role of the uh of the investor um you had mentioned earlier in the practice of investing uh and you had divided it into exclusion integration Focus uh and impact and and it reminds me a bit of the corporate governance debate between exit and voice you know what is more effective in in improving governance and do you have any thoughts on that I mean how should what do you think the investor for example might be more beneficial uh by being more proactive or should they just simply have a more exclusionary strategy rely more on exit yeah well um this uh running for the doors approach I've never been a big fan of it uh I I understand the logic behind it because it solves my problem right now but it solves it in a way you just say okay I close my eyes I don't see it and just because I don't see it it's now it's gone uh that is not necessarily an approach I I I do pretty much buy into so being a responsible investor means pain it's not so easy to get rid of any challenge just by closing your eyes or hitting the red button uh on your trading terminal so uh it's a painful process uh in order if if you really want to change something but uh if if you would run through the doors all the time what would be the implication every company would at the end of the day know that those investors that remain they don't care about any uh problematic way of doing my business uh so why would I change but it's definitely I know that from from the engagement programs that we have with companies it's a painful process for both parties right because at the end of the day it's like giving homework right and nobody likes homework that's just what it is but at the end of the day if you look back also on our personal CVS without homework we would probably not be able to attend University to move on and that's why it's so important although uh it's not necessarily all the time uh big fun and engagement there is also something what you can do is uh is you can measure whether successful engagement and clearly admit not every engagement is successful right but successful engagement tend to lead to outperformance I give you one example because I could talk about it is is public um if you just for the sake of curiosity look at royal. Shell I mean we're talking in the context of climate and uh definitely it's not a green company right so nobody would there to claim that however uh there is an initiative combined a shareer action initiative called uh clate action 100 and uh they engaged shell and end of 2018 I think was the 8th of December 2018 shell published uh that they really want to go Net Zero going forward um and they want to reduce their footprint and they actually linked the compensation of the board against that and if you just look 2019 and 2020 what happened how they adapted their business model it's a slightly a different company now than it used to be at the end of 2018 so change happens and also societal returns will happen now question is did the investors also gain something out of it because at the end of the day investors are not charitable or Charities right and uh now what what is the alternative that you can do as an investor what options do you have so uh shell is one you believe in the change story you invest option two is you say I have no opinion whatsoever and that's not so uncommon believe me you buy the oil and gas sector for instance uh the the msci world oil and gas third one is you say I do nothing uh I buy cash probably these days not so a great idea anymore given the negative interest rate environment and the third one is you go contrar and say uh that that that that's all Uh crap I don't believe in that uh I buy Exxon yeah so and if you just look at the performance outcome after announcement of these engagement programs and not obviously not everything can be attributed uh to uh to the engagement program but you will see that R shell outperformed all gas market it definitely outperformed the central bank deposit rate uh it outperformed Exxon so it was a good investment and again not every investment in this case will turn out that positively but invest in positive change that is something that usually works in quite a significant number of cases and again the capital markets they reward you for future action not for the status quo and that's why being proactive is much better than running out of the doors thank you very interesting now I can I can just confirm what you just said Carson uh for um this one case on academic evidence that essentially shows the same thing for for a large sample of engagements on ens issues and a colleague of mine uh here at s is looking at um shareholder resolutions for ens issues and finds exactly the same as you say so even um they they have a very low threshold of going through but there's positive change that comes out of this also returns for investors so can only confirm this um a question from araseli guz is um quite interesting a question about if companies must include supply chain in their ESG reports and if investors ask for this so in a sense if we think about recent things that happened for example in in a particular fashion retailer in the UK and problems in the supply chains should companies be responsible for their supply chains and do you see are you interested in are you looking at this as well as an investor I that's uh that's a very interesting uh topic um because this is also something that in well that affects investors uh to a great extent I mean reputation your risk is also sort of a component of the valuation and of the risk assessment that should not be neglected at all and if usually something goes wrong it tends to to be in the supply chain down the road uh because these are usually Emerging Market suppliers less transparency control is uh at best below average if at all and uh it poses a significant risk to companies right is it directly affecting valuations and to my if I look at what I've done analytics in the past I would say no it's not that close right now to valuation but it will change and why is investor is always prepared because right now even if you would say it be it would become relevant you would still not have enough data so trying to collect data early on to be prepared once a certain additional driver becomes relevant is uh probably a good idea so enter your question uh should should a responsible investor uh take into account what happens in the supply chain even n minus two not just the direct suppliers yes they should is it from an Investor's perspective right now the most relevant topic no will it remain as it is probably not I mean uh you just uh need to consider one one simple fact of life um what is sustainable is ultimately the core driver for your license to operate and your license to operate is not just about valuations is also about what does that mean and you need to put it into the context of time if you would look at what happened right now in in context of climate 15 years ago nobody would have ever gone out on the streets and uh actually protest against uh global warming but this is now a case so environmental topics affect valuations now years 15 years ago probably not that much supply chain I would say is the next step um that that will come after that probably not in the next uh two to three years uh but you see already for instance in Switzerland in December there's an initiative where the populace is being asked to vote on whether uh companies should take responsibility for what happens uh in the supply chain and this is just the first step into that direction but again prepare now collect the data as soon as possible not necessarily use it already for valuation but be prepared is the best thing you can do and supply chain topics should be also and there are already also a component in the engagement discussions we have with a couple of companies but obviously that's then not public uh Carson I'd like to ask you you mentioned earlier the uh how UBS for example uh collect data on sustainable practices and of course the definition of sustainability is very broad but but the bank itself the asset management division uh seems to be doing a lot of work in investing in information about sustainable sectors of the economy but also of course it relies on thirdparty sources for information on sustainability like sustainable rating agencies and and I was wondering what you felt uh what type of balance should should an institution like UBS strike between the internal data you get and then also Reliance on third party sources of data regarding sustainable factors yeah well it's a a very important uh very important question because whatever you do ultimately even data is an investment and uh what what happens more and more is uh that you could consider uh sustainable Investments or ESG investing as a big data game so at the end of the day it's all about predicting future outcomes and selecting additional drivers to it now how relevant becomes buying external data versus doing your internal research I mean at the end of the day data is tool is a tool and uh you need to apply it in in the right context so for instance um if you um if you would look into equities then uh probably upside potential for the future so Alpha potential that you can that you can unlock using proprietary research is theoretically higher however the transparency levels in developed markets is rather High whether it's worthwhile putting an additional analyst resource on develop markets equities that's to be seen right we know that active managers in developed markets uh do not necessarily tend to outperform passively managed uh strategies and that's because the data quality is high same topic equi Emerging Market might be different right so you look at the index performance if you compare passive indices e indices in Emerging Markets with the conventional one you don't see the same picture that you would see in the developed market so putting analyst resources there to unlock Alpha that is clearly something that makes sense more in the Emerging Markets than in developed markets fixed income where you have also non-listed issuers it makes even more sense to put uh additional proprietary research uh behind it so it's it's the use case uh the strategy determines your Investments but uh since the majority of assets uh right now also given the interest rates the focus is predominantly on the equity side the data game and combining data and trying to unlock additional sources for Alpha is is out there so there's no surprise that the majority of larger asset managers and asset owners will have one I would say homebased data provider that they consider their primary data provider but nevertheless they will not rely just on that they will kind of complement that with other data providers be it for calibration reasons or or to figure out or get more ammunition uh to to distill additional insights out of that that cannot be captured by each uh individual external data provider itself so means to ends that's data but more data is required and I guess uh if if you just look also at the listed uh prices of equity prices of ESG data providers and just compare that to the broad Market you know where the game is going may I just follow up on this I think in what you just said there was something interesting with the distinction of develop versus Emerging Markets so would I then be correct as an MSA to expect a sustainable investment strategy or an ESG integration to deliver more positive returns or higher Alpha in Emerging Markets than it would in developed markets so would that strategy is sustainable investing entally better in developed markets just because the the information is there's less information and we getting more information on companies now in in in absolute terms whether developed markets uh are performing better than uh the the Emerging Markets or vice versa that has nothing to do with ESG that's just the fundamental business model of the region but within each sector uh proprietary data versus publicly released data that makes a difference so uh I would phrase it differently saying um I I would not necessarily expect an additional analyst doing some research in developed markets to provide the same amount of alpha compared to uh the same resource uh actually put into work analyzing emerging market equities or fixed income issuers right that would be my answer but Equity versus fixed income that has nothing to do with sustainability uh that is just uh I would say Capital markets driven by by macro topics and they are not being changed by ESG as such carsten I couldn't help but look at some of the countries on the chart uh regarding the performance of funds and uh and and what it does show is that funds Equity Funds and bond funds that that do have a focus sustainable funds tend to on average perform better and to lose less than conventional funds uh um do you think uh why do you think that's the case I mean I mean so consistently across the board is it the way that we Define sustainability that that really influences that figure more or is there a real value do you think for the investor and seeking out more sustainable Investments well um I would say uh in general sustainable investment should not necessarily uh create Alpha uh especially not in in in develop markets uh because the majority of information is incorporate if everybody does uh proper analysis work and assesses the the assets properly you should not be able to do so so why you see that so uh this is now a bit of gaswork so I cannot prove it but one suspicion I do have is you have uh sort of a transition Alpha and one of these reasons is that right now uh a lot of institutional investors as we have seen in the regulation as part of the discussion around regulation and uh let's let's not fool ourselves right institutional investors control over 80% of global assets so they are the driving force of where assets are going it's not the individual investor that does that uh so they have now the clear objective to become green or at leasts uh environmental and socially conscious and and consider more ESG so it means they need to sell certain assets that are less uh compliant to this new philosophy new standards and buy more of those assets that do and this is exactly what you see here I I think you see kind of a transition or the implications of a transition from a less sustainable world to a more sustainable world and I expect this outperformance uh to reduce over time that's one that's would be the philosophical answer to it now uh if if you look at uh pure quantitative uh indications of that um what does ESG mean so what does uh ESG correlate with when you talk simple Factor Investments and uh you see a rather High correlation to Quality to to growth and over the last 10 years um the good old discussion value versus growth was clearly one by the growth factor so uh since sustainable Investments have a much higher exposure to growth and quality than these grayish conventional funds here uh that have a bigger exposure to Value you could also argue this is because uh the growth factor in particular outperformed the value Factor significantly over the past decade I'm in discussion with our portfolio managers and also third party portfolio managers they all keep telling me yeah yeah but the value for decades has been the has been the driver and next year everything is is different so value will come back and I always keep saying yes maybe I I cannot predict the future but I'm a strong believer in the allocation implication of Regulation and as long as the transition from the old world to our new regulatory world is not concluded as long as even more regulation is hitting the road uh I really have a hard time to believe that value is getting back in a I would say substantial uh and and prolonged way so it will at some point in time for sure but probably later than we all might expect and and I can't help but to add that the UK fund manager in in Equity Funds do particularly bad don't [Music] they why is that the case uh well I would not say that these are the UK managers this is just funds dealing with UK equity and I guess if you look at particular the last three years um I guess you need to look to Downing Street and write your thank you letters there thank you thank you person um um conscious of time um maybe I'll I'll give you the last word if you want to um say maybe what investors the last piece of advice for investors that want to invest sustainably um what's the way to go what's what does the future look like oh uh that is uh the good old question well uh predicting the future is difficult and I think as an investor um you need to make conscious decision what you want to achieve what are your objectives and uh in discussions should I invest sustainably Should I stick to what I have until somebody tells me what sustainability ultimately means so we have this uh looked for unified Definition of sustainability as said look forget it it's not going to happen right you need to implement your conviction and what you should do is you should uh quantify the implications of what you are doing to the letter you should not follow any Pursuit and say just because I see great tunberg every morning demonstrating in front uh of my office I know should now be a climate investor if you want to do that you need to always explain why what do you expect out of it what is the the main reason why you're doing it and that's why I am allocating my my my funds over there we have so many data already that would can pretty much Implement everything but coming back to my little um thought picture about uh ESG Lego the building plan what you ultimately want to build that is your job as an investor then you know I have Lego Stones they need to fit I cannot combine Dupo with Lego although I learned for my kids it's possible uh however ultimately you should stick in one set of criteria that you're considering you take you should take as much data as possible in order to make a conscious decision how to implement and ultimately sustainable Investments is not so complicated you have an asset allocation and the risk adjusted return or the Capital Market assumptions behind are no different right compared to traditional investment so you you have your allocation problem in the same form and shape than you had it before what changes is the selection and the filter criteria how do I select assets to populate my strategic asset allocation or my tactical asset allocation that is where yourg comes into play and this is driven by your conviction by your by by by your thoughts and uh I always tell them look even greed although you wouldn't necessarily communicate like that being greedy is a leg legitimate objective right because you can optimize short-term Trends and actually capitalize on this uh transition Alpha if you want to and also a little fun fact as a sideline uh if you look at the corporate disclosures um we talked about this supply chain topic um you can also say there's a un Global compact the norm based exclusions and if if you just look at uh the alpha potential of for instance excluding although I said I'm not a big fan of exclusions uh excluding companies that fail certain Norms look at the gpf the Norwegian State Pension Fund they disclose the attribution of negative exclusions and generates Alpha right and then if you would advise a client and say look uh just focus on for the sake of Simplicity or negative exclusions and then you look how they communicate what they did there's a complete different narrative behind it uh from where we start off which was maximize Alpha be greedy and this is what you need to consider how do I communicate what do I have to communicate what are my objectives and the rest is pure mechanics so so don't shy away from doing it and don't wait for somebody to tell you what is sustainability you will never get that answer uh at least not in in my remaining lifetime I probably fear just do it I hope the call to action is heard and many will um Implement and their own strategies and communicate them accordingly as you say so Carson thank you very much for these insightful comments and insightful presentation and uh for standing in for