The Challenges of Bank ESG Investment Strategy (webinar)

it’s a broadcast welcome everyone just waiting asecond for participants to join i can see it in these coming in that’s great right waiting one a few more seconds forparticipants to join and then we’ll kick off great well everyone is still joining well welcometo this third of our webinar series for the bank governance program it’s a it’s a pleasure toto have everyone on this call and to have more participants joining as we go along my name isamir amelzade i’m one of the co-directors of the bank governance program at the site businessschool university of oxford and together with colonel alexander who is also on this call and drcarson gliddler our speaker today who current will introduce in a second where we are very happy tohave with us talking about a very important and very timely hot topic i would say so i’m expectinga lot of great discussion and insights um so this seminar today as i said about esgand investments or sustainable investing um as a broader sense and we will hear soon fromfrom dr castle at the moment i will hand over to the co-director kevinalexander to introduce our speaker thank you amir and uh it’s pleasure to for to havethe third seminar in our bank governance program uh at the outset i’d like to also uh acknowledgethe helpful support of the research network of sustainable finance uh here in zurichand the swiss banking association uh through which we have been engaging with ourdiscussions on developing seminars and uh webinars and so we’re very happy today that we have drkirsten goodler with us who is has extensive experience in the area of banking and assetmanagement of course when we talk about asset management we sometimes think of blackrock andthe big investment management companies but also we we tend not to focus so much on what the bigbanks are doing big banks like ubs credit swiss barclays they have big asset management divisionsand so we’re very happy that today we can have uh karsten gupter to speak with us uh carson issenior investment specialist within the ubs asset management division he is responsiblefor representing the sustainable investing capabilities of ubs to their institutionalclients prior to joining ubs carsten worked in ubs’s wealth management division and he was therehe was head of sustainable and impact investment and distribution uh before joining ubs uh carstenworked for commerce bank in 2011 uh he also worked with credit suisse private banking in zurichand he worked with the boston consulting group so he’s got a lot of experience with other banksand what they’re doing in the area of investment strategy and sustainability and he’s currentlythe senior investment specialist with ubs asset management we’re very pleased to have carsonhe he has a doctorate uh in entrepreneurship from university in germany and he also has a masterof science in financial engineering and marketing from the uh from the university of brantfordand also a master of science from leipzig graduate school of management so he has immensebackground both educationally and in working with some of the leading international financialinstitutions in the area of asset management so i’ll turn it over to dr goodler thank youthank you very much for these kind words and introduction also one welcome from my side andthank you for the opportunity to be speaking about a topic that is pretty dear to me not onlyprofessionally but also from the way i believe investments should play a role in in societyso this is not only due to the fact that i have three kids who are pestering me prettymuch from morning till evening that i do more in terms of uh societal returns so we speakabout that in a bit so thank you again and i would say let me give you like a 15-minuteintroduction how i see sustainability evolving what are the drivers behind it what are the mostrelevant influence factors to that in the later on and we’re looking forward to a food for an activeq a so i hope you can all see my presentation now all right so there are twoparts to it that i want to show and discussed today so the first one i hopeyou can see it now it says it’s sharing okay so um theory and practice these are thetwo main chapters of what we will discuss today around sustainable investments so and if we startwith the theory so what is sustainable investment in general not only for ubs asset management soat the end of the day what sustainable investments is all about on a longer term view on returnand risk so we define the risk and the return component in a broader sense and the objectivesare improved risk adjust return in the long run it actually have sort of a societal returnwhich is called the positive environmental or societal impact alongside the financialreturns so it’s not either or at the end at the end of the day it’s also aligning valuesthat you personally have the investor has with the assets so this is i would say the heart ofsustainable investments if you would summarize that it is performance plus so you havepretty much the same risk adjusted returns that you would expect from a conventionalinvestment but you will have a societal plus and that’s about it and there are various wayof looking at it you see here at the bottom you analyze corporates for e s and g which isuh often treated as a synonym for sustainability and you do not only look at corporates you alsolook at sovereigns at governments in order to evaluate what drives their sustainability returnsorry uh sorry to interrupt um we still see your your um main the front slide it seemslike the slides are not changing i think we’re currently just seeingthe first slide of the pdf you might need to share again okay try it again so here we go yes all right so that was prettymuch the performance plus component what are you considering when looking at sustainabilityand the most important thing is a long-term view and this is i would say the key valuewhen it comes to assessing for financial assets so what is driving it um at firstuh said you see here uh the growth of sustainable investments over the past coupleof years and you see a kegger of roughly 14 per annum and this is quite uh interesting as ifyou take other studies that look at the growth of financial assets for instance the bostonconsulting groups one or pricewaterhousecoopers wealthman group with rf studies you will find thatconventional assets they grow at a pace at a rate of six percent per annum and i said sustainableinvestment grow more than twice of that and this is true for pretty much every region youcan see that here on the right hand side and i think the acid growth as such is right nowpredominantly driven by institutional investors and what is driving the behavior of financialassets so the allocation of financial assets of institutional investors it’s a lot driven byregulation so what you see here on this page five is not necessary stock markets i would love to bethat the stock market it is actually the number of regulatory initiatives that deal somewhat withactual investments or disclosures in the context of esg you see this is a fantastic chart andit has impact as you have seen in the previous just slide mention a view of the globaluh regulate regulatory initiatives um a lot of that is about e s and g it’s aboutsustainability and in particular it’s about uh the environment so the paris climate accord hasbeen in the last couple of years a major driver for regulatory initiatives across the boardincluding the us and i think this has a broad influence on what institutional investorsand also banks have to do keyword here and idd the insurance distribution directivethat will lead to institutional investors and banks and asset managers and also insurancecompanies asking their clients do you really want to invest sustainably and this ismandatory so now we have seen what the policy makers want now the key questionis what do private investors want without being asked by by regulators to act in aparticular way i have taken out here one part actually that’s the uk outlook of the ubs investorwatch where ubs is asking its private clients what do you think about sustainableinvestments do you want to do it and what you see here is the uk in particularis lagging behind only one-fifth of the invested base says yes uh i really want uh to invest andactually do it i put my money where my mouth is so more than one percent of sustainableinvestments dedicated to esg investments and other countries as you see here are fartherahead and if you look at china that’s a particular interesting one now what are the main reasons whythese numbers are not even higher because if you usually ask somebody do you behave or investsustainably or do you like sustainability then pretty much everybody will say yes but seeminglynot everyone puts the money right in my office and one of the key drivers you see on page 8 is thatthe terminology that’s being used is pretty much confusing you have a multitude of different termsthat are sometimes used synonymously sometimes not sometimes even different banks or asset manageruse the same term in a completely different way and that’s why they say if i don’t understand whati do then i rather do not invest and that’s the major difference between the institutional spacebecause there you have the regulator telling you what to do and what is right or wrong but you asan individual with your own views your own values coming back to what i said in the beginningaligning the values that you personally have with your investments that is something much moredispersed and more difficult to actually implement compared to institutional world now there’sa second uh question what does sustainability mean what is sustainable i’ve just taken here oneexample of tesla everybody knows tesla everybody has an opinion about tesla and i’ve taken twodifferent data providers that actually analyze tesla so on the left hand side you will findmsci esg research with their assessment on the right hand side or the number two in the spaceso stanalytics and they look at sustainability from various driver levels but the conclusionis completely opposite if you would believe what msci is saying would say it’s a fantastic companyit’s a 7.1 on the scale from 0 to 10 with 10 being the best and quite the opposite when you look atsocial analytics they say that’s uh a challenge and that is pretty much one thing that you needto consider as an individual if nobody actually somewhat says yes this is sustainable and thisis not these are the standards we need to apply then especially private investors say then ishy away from it then i wait until there is a common sense established around it now thiswas a theory a lot of problems it’s growing but what can we make out of that so how can wesynthesize all of these inputs into something that is actionable now we’re coming to chaptertwo which is the practice the implementation part so first of all is transparency i guesstransparency is one of the most important things in sustainable investments or esg because you needto establish quite clearly what are you talking about and what has been established over thetime is a framework of four plus two approaches how you think about sustainability when itcomes to investments and these can obviously then later be combined but but what are whatis the gist of it first the famous been around for the longest period of time this is also quitenatural for an individual investor because it tells you what lets you express what you dislikeand there are two ways of expressing dislike one is based on a product so i don’t like alcohol idon’t like tobacco and you see already a problem talk about esg or or tobacco not being good to toa smoker so probably you won’t run into open doors so product based exclusions and norm spaceis not about what you produce but rather how you produce it so if you just takei would say a water purification plant and it produced the most fantastic uhcompletely energy neutral cleansed water but unfortunately you employ childrento actually reduce your operating cost that would also not be considered as sustainableso what is being produced and how a goods and services being produced that’s the exclusion esgintegration is a risk view and you see already in the mid if you look at the market size it’s asbig as the exclusionary dimension this is kind of allocating a certain value at risk a certainrisk budget to esg risk so you kind of distribute your risk budget to not only financial is thetraditional one that where we all know how to analyze it and quantify it but also give it a bitspace in terms of years your risk and then you can think about one big year series so do i want tohave one big company that is quite controverse but i think the potential future award may compensatefor it or not or i take little ones or take none now and that’s also the difference now we go intoone of the strategies that you predominantly find in the private investor space sustainability focusthis is about minimum standards so you set out clearly what is a minimum standard irrespective ofwhether not adhering to it might even reward you to a greater extent financially but you say thisis what i like this is where i invest and there is the red line i don’t cross it and impactinvestments goes even one step further because it just does not qualify a certain assets assustainable or not but it asks you to quantify the financial societal return i just take mywater example if you have one cubic meter clean water it’s great sustainable but having one cubicmeter additional clean water in london as opposed to in goa in india that makes a huge differenceif you think in terms of death rates of children diarrhoeal cases or even sick days because ofactually polluted water so quantifying that means you need just not to know what products are outthere but also where they are being distributed and then the stewardship this this votingengagement is supportive supportive activities in order to make companies and government changeover time and it’s uh ultimately also you could kind of say that is invest in positive changeso this is kind of parameters if you look at the top four strategies and stewardship votingengagement is an enabling factor so what you see here i just briefly touch upon it page 12 yousee sustainability focus on the right hand side this is really what typically private investorsthink about when they invest in a diversified portfolio from us with a sustainability focusso it means you have the exclusions activity based you have norms based exclusion which iscalled single company exclusions for instance the u.n global compact is important you haveesg ratings that need to be better compared to a certain conventional reference point on theother hand side also a better co2 profile ie your companies in your portfolio you needto emit less co2 for what they produce last but not least there need to be a clear activeengagement a stewardship component attached to it so that there are certain societal outcomes thatare promoted with the assets that you’re managing so how do you go about that from theinfrastructure side obviously you need to know uh what the sustainability profile of a certainasset is and there is this is where research comes into play so you can buy research thereare dedicated research companies like the ones we have seen for instance msci is geo researchor social analytics but this is usually just public data that is kind of being made easieraccessible for an institutional investor so you don’t have to go through all the websites and allthe sustainability reports and financial reports yourselves you can just buy it but by naturethis is always a bit backward looking and that’s why in proprietary research every asset managerevery wealth manager does that this is way less small amount of indicators that you’re lookingat but they need to have a much higher predictive validity because you will be rewarded forfuture returns and this is where these kind of internal assessments are geared towardyou just one example for a fixed income research piece and you benchmark it you calibrateit and ultimately the validity is here the key the key objective and then aside from that youmonitor risk we talked about esg integration as a risk management tool what i’ve shown here isjust an example of the in principle workings of our esg risk dashboard so we take a multitude ofdata in their our own as well as third-party data there are different drivers reputational riskdrivers governance very important absolute esg risk so it has a highly likelihood that whenis the mining sector something will go wrong sooner or later this uh these mishaps is thissector is much more prevalent for instance in um in the software sector and this then sends outthe risk signal and depending on what strength uh you are either allowed to take one or twoof those high risk companies or in terms of the sustainability focus you must not is again thisis like a sustainability lego you have the tools you have the data but at the end of the daywhat you want to build this depends on your values and on your objectives but having all thesetools together that is important and that makes ultimately the difference and last pointthat i want to make is you’ve seen these ingredients these lego stonesthat you need to build something and i said in the beginning transparency is keyand this is what we are doing now now you need to kind of synthesize everything back togetherand explain to investor what you have done so what you cannot do is communicate thedifferences between the various data providers so how do they assess the company you need todecide for one and then you need to communicate against that irrespective of whether your strategyan individual level is managed against the framework but consistency in the way you’reshowcasing what you’re doing that is key and this gives you the credibility and it helps to overcomethis obstacle that investors say i don’t invest because i don’t understand what i buy so yousee rating esg profile you see carbon emissions you see exclusionary norms based as wellas product base and you see even the sdgs in a combined way and then you have againthose five criterias you promise something you deliver against it and you allow a thirdparty to judge to be the judge of whether you have done well what you promised or whether youmade mistakes and this gives the credibility that ultimately you need to have in order to besuccessful so last word on performance uh there’s always been this discussion and debate about isthere a kind of a compromise that you have to like a trade-off between esg profile and financialreturns so what i’ve done here is on this slide and i hope you can numbers are rather small thisis a one year three year and five year uh return average of equity funds and bond funds across thewhole morningstar universe that means all funds that are allowed for distribution to privateinvestors in europe are kind of categorized into equity us or bonds global usd or emergingmarkets out currency and then they are compared against the conventional counterpartsin exactly the same segment so gray is conventional fund red is the the esg fundsand what you see one year three year five year uh you do not necessarily need to fear thatsustainable investments do underperform as on the contrary but at the end of the day and this is myclosing remark before we go to the q and a session its performance plus you should expect the samerisk adjusts it returns with the additional benefit the plus being a societal impact and thatdepends on how you build your sustainability lego with that i hand back to our moderators forthe q a session great well thank you uh karsten very much indeed for a very insightful andthoughtful uh presentation uh discussing the theory and practice of sustainable investmentwe’ve got some questions that are coming in but i thought i might just ask one to kick offthe discussion uh it has to do you mentioned in one of the earlier slides that regulation seems tobe one of the primary drivers in the development of sustainable investment practices and we see alot of regulatory initiatives all over the world china tends to be doing a lot more than saythe u.s for example but nevertheless regulation is very important do you feel that there is anybenefit to having a more harmonized or harmonized international regulatory approach to sustainableinvestment we see now that many national authorities like the us china uk switzerland havevery you know varied approaches do you think that regulation could play a more useful role if itwere more linked up or possibly more harmonized yeah there’s there are two hearts here beating nowin my chest so uh when it comes to if the primary objective was to channel and allocate as fastas possible as much as as many as as possible to a common goal for instance let’s take climatechange let’s talk about net zero by 2050 then yes this alignment would help a lot howeverwhen it comes there’s now the second part to it when every investor does pretty much exactlythe same so you’re hunting assets that are at some point in time rather scarce then you willhave a highly probability uh high probability that you have misallocations of of assets so youwill have assets prices that have nothing to do with reality they will just be inflated becauseevery investor is hunting exactly the same assets and uh that is a challenge so um ina nutshell i like diversification i’ve done investments all my life andthere is one truth is the only little inch against defaulting or underperforming when itcomes to your investment returns is diversify you need to diversify and that’s why i’m not tookeen on having the bible of sustainability right so whatever he said okay this is exactlyhow we define exactly how we measure it uh just to avoid these misallocation effectsso uh i rather have three or four more years where people are saying uh maybe i still don’tknow yet i need to find my way or maybe even use the asset managers the wealth managers inorder to give feedback what they think because they all have different perspectives thenif every sector does it in an aligned way but slightly different then the danger of kindof these unwanted side effects is probably a bit more mitigated and i think this is two or threeyears of more confusion well invested thank you we i think we have a question or coming outor amir would you like to uh ask a question uh yeah we have a question um uh we’ll get tothat in a second please keep them coming um let me get also one question in before we getto the audience and in particular because you mentioned it right at the beginning uh carson thatthere’s still some skepticism so you mentioned the it doesn’t seem to look like private investorsare putting their money where their mouth is so then so this disconnect between institutionalinvestors and institutional products and and private investment so then the question i haveis um so where does the skepticism then come from because as you also said your childrenare pushing you to do something for for a society and in the environment so itseems like the the newer generations are pushing the older generations to shift wealthalso into into the sustainable products so so is it that we’re still skeptical about thereturns is it the confusion that is making us skeptical or is it the skepticism or around theactual impact that we are having with these yes there are two things i believe that are littleobstacles on our journey to more assets from the private investor side invested sustainably oneis being this confucianist terminology uh topic and that is exacerbated or made even worsebecause the majority of advisors they are not yet so comfortable in advising their clients aroundsustainability because they’re facing exactly the same challenge they need to somewhat sidewith a view on esg on sustainability be it on the data side be it on the norms side i mean isaid if you want to say i built a sustainable sustainability focused multi-asset portfolio whichis usually the case when it comes to advisory and you need to think about do i commit myselfto avoiding alcohol tobacco or even nuclear so that that these are things where there’s nostandard i mean if you ask a frenchman about the sustainability profile of nuclear energy youwill get a complete different answer if you then you would ask a german or austrian investor ora swiss investor and that’s why they don’t like to ge go out and say okay this is my view my dearclient uh you should invest exactly like this and uh it’s it’s it’s less uh concerns aboutreturns because everybody has understood by now that it’s probably not the worst idea to investsustainability but sustainably but talking about it advising about it framing what sustainabilitymeans in terms of a portfolio context that is the key challenge so i don’t thinkthat the individual investor is the bottleneck i am strong strongly believe that the clientadvisors are the bottleneck and not daring to advise the clients right now but this isdiminishing over time it takes a lot of efforts and trainings and ubs is in the same situationwe need to train train train train uh only then will you also see a pickup in the private investorspace once a investor private investor has done it they see the performance they see what’s happeningthat’s and then actually you see the assets flow in the second part is also very valid pointwhat is the actual impact so we’re talking this impact bucket that you were mentioning soquantifying societal return of your investments and this is a bit uh of a challenge becauseit’s expensive it’s it’s not mission impossible it’s actually very much possible but it’s superexpensive and if you i would say offload and allocate cost for impact measurement to a certaininvestment strategy then it will underperform so either you shy away from measuring it and that’sright now still the situation for the majority of asset managers you simply don’t do it you treatimpact investments like an r d department even like a philanthropic investment so you just focuson those investors let’s say i want to advance even academia in terms of how to measure societalimpact and then i intentionally take into account that it might reduce my risk adjusted returnsbecause of the additional cost incurred but this is not the fact not the case for the majority ofinvestors so uh this is not now in the second part so impact investments a client want to know aboutit but they usually don’t want to pay the bill thank you yeah so let’s move on to thequestions from the audience there’s a few coming in and so there’s one question on it asks how useful is an esg consensus scorewouldn’t it nullify the usefulness of contrarian esg view which may very well be an early warningof a particular company so essentially i’m assuming it relates to your comment on if everyoneis running investing in the same companies so you everyone’s looking at the same esg scores arewe not just creating essentially another problem yes exactly yeah i fully agree i meanthis is exactly my point why i was saying um i’m not the biggest fan of having oneinstitution saying this is right or wrong in terms of sustainability i like these uhdifferences i like uh diversification of use and when it comes to the risk dashboard um onecould also treat it in the following way and then look at it in the following way so ifyou have different drivers behind a certain esg rating or esg score outcome so it can be anabsolute rating it can be a relative approach the materiality metrics so how important e s andg dimensions are relatively seen in each sector to assess a certain company uh they aredifferent then then if you take that into account and combine it and i would say three out offour input factors based on complete different views on what sustainability is and whethera company or an asset is sustainable or not and everything says it’s a bad companythen it’s very likely a bad company but if uh like in the case of tesla ifit’s the one says is great one says is bad you need to ultimately figure out what makesmost sense and there comes into play your own proprietary research where you say i do not justwant to look at what the company is doing now but i’m here to change in the future because thecapital markets do not reward you for what has already been implemented what’s the sales quotethey reward you for what is being done in the future and if your own valuation says okay itsides with tesla let’s say msci so maybe that has a more predictive validity i’m not saying herethat is the case we’re just saying assuming it so uh then you make your investmentdecision accordingly and follow the route of invest in positive change and wehopefully reward at the later time for that so diversification is key and assetinflation will be the result if you would follow like sheep just one just oneindication how things should play out um carson i thought i might ask a question havingto do with the role of the uh of the investor um you had mentioned earlier in the practice ofinvesting uh and you had divided it into exclusion integration focus uh and impact and it reminds mea bit of the corporate governance debate between exit and voice you know what is more effectivein improving governance and do you have any thoughts on that i mean how should what doyou think the investor for example might be more beneficial by being moreproactive or should they just simply have a more exclusionary strategy of relyingmore on exit yeah well this running for the doors approach i’ve never been a big fan of iti i understand the logic behind it because it solves my problem right now but it solves itin a way you just say okay i close my eyes i don’t see it and just because i don’t see this nowit’s gone uh that is not necessarily an approach i i do pretty much buy into so being a responsibleinvestor means pain it’s not so easy to get rid of any challenge just by closing your eyes orhitting the red button on your trading terminal so uh it’s a painful process in order ifyou really want to change something but if if you would run through the doors all thetime what would be the implication every company would at the end of the day know that thoseinvestors that remain they don’t care about any uh problematic way of doing my business uhso why would i change but it’s definitely i know that from from the engagement programs that wehave with companies it’s a painful process for both parties right because at the end of the dayit’s like giving homework right and nobody likes homework that’s just what it is but at theend of the day if you look back also on our personal cvs without homework we would probablynot be able to attend university to move on and that’s why it’s so important althoughit’s not necessarily all the time big fun and engagement there is also somethingwhat you can do is is you can measure whether successful engagement clearly admit not everyengagement is successful right but successful engagements tend to lead to outperformance i giveyou one example because they can talk about it is public if you just for the sake of curiosity lookat royal dutch shell i mean we’re talking context of clima and definitely it’s not a green companyright so nobody would dare to claim that however uh there is an initiative a combined shareholderaction initiative called uh climate action 100 and they engaged shell and end of 2018 i think wasthis eighth of december 2018 uh published that they really want to go net zero going forward umand they want to reduce their footprint and they actually linked the compensation of the boardagainst that and if you just look 2019 and 2020 what happened how they adapted their businessmodel it’s a slightly a different company now than it used to be at the end of 2018 so changehappens and also societal returns will happen now question is did the investors also gain somethingout of it because at the end of the day investors are not charitable or charities right and nowwhat what is the alternative that you can do as an investor what options do you have so uh shellis one you believe in the change story you invest option two is you say i have no opinionwhatsoever and that’s not so uncommon believe me you buy the oil and gas sector forinstance the the msci world oil and gas third one is you say i do nothing i buy cashprobably this day is not so a great idea anymore given the negative interest rate environmentand the third one is you go contrary and say uh that that that’s all uh crap i don’t believein that i buy exxon so and if you just look at the performance outcome after announcementof these engagement programs and not obviously not everything can be attributed to uh to theengagement program but you will see that royal child performed on a gas market it definitelyoutperformed the central bank deposit rate uh it outperformed exxon so it was a good investment andagain not every investment in this case will turn out that positively but invest in positive changethat is something that usually works in quite a significant number of cases and again the capitalmarkets they reward you for future action not for the status quo and that’s why being proactiveis much better than running out of the doors thank you very interesting i can i can justconfirm what you just said carson uh for um this one case on academic evidence that essentiallyshows the same thing or for for a large sample of engagements on ens issues and a colleague ofmine uh here at saeed is looking at um shall their resolutions for ens issues and finds exactlythe same as you say so even they have a very low threshold of going through but there’spositive change that comes out of this also returns for investors so can only confirmthis um a question from araceli gutierrez is quite interesting a question about if companiesmust include supply chain in their esg reports and if investors ask for this so in a sense if wethink about recent things that happen for example in a particular fashion retailer in the uk andproblems in the supply chain should companies be responsible for their supply chains and do yousee are you interested in are you looking at this as well as an investor i think that’s uh that’sa very interesting uh topic um because this is also something that in well that affects investorsuh to a great extent i mean reputational risk is also sort of a component of the valuation and ofthe risk assessment that should not be neglected at all and if usually something goes wrong ittends to be in the supply chain down the road because these are usually emerging marketsuppliers less transparency control is at best below average if at all and it poses a significantrisk to companies right is it directly affecting valuations and to my if i look at what i’ve doneanalytics in the past i would say no it’s not that close right now to valuation but it will changeand a wise investor is always prepared because right now even if you will say it would becomerelevant you would still not have enough data so trying to collect data early on to beprepared once a certain additional driver becomes relevant is probably a good idea so enter yourquestion uh should a should responsible investor take into account what happens in the supply chaineven n minus two not just the direct suppliers yes they should is it from an investor’s perspectiveright now the most relevant topic no will it remain as it is probably not i mean you justneed to consider one one simple fact of life um what is sustainable is ultimately thecore driver for your license to operate and your license to operate is not just aboutvaluations is also about what does that mean and you need to put it into the context of timeif you would look at what happened right now in college of climate 15 years ago nobody wouldhave ever gone out on the streets and actually a protest against global warming but this is now acase so environmental topics affect valuations now 10 years 15 years ago probably not that muchsupply chain i would say is the next step um that that will come after that probably notin the next two to three years uh but you see already for instance in switzerland in decemberthere’s an initiative where the populist is being asked to vote on whether companies should takeresponsibility for what happens in the supply chain and this is just the first step into thatdirection but again prepare now collect the data as soon as possible not necessarily use it alreadyfor valuation but be prepared is the best thing you can do and supply chain topics should bealso and there are already also a component in the engagement discussions we have with a coupleof companies but obviously that’s the public carson i’d like to ask you you mentionedearlier the uh how ubs for example collects data on sustainable practices and of course thedefinition of sustainability is very broad but but the bank itself the asset managementdivision uh seems to be doing a lot of work and investing in information about sustainablesectors of the economy but also of course it relies on third-party sources for information onsustainability like sustainable rating agencies and i was wondering what you felt uh whattype of balance should should an institution like ubs strike between the internal data youget and then also reliance on third-party sources of data regarding sustainable factors yeah wellit’s a very important a very important question because whatever you do ultimately even data is aninvestment and what what happens more and more is that you could consider sustainable investments oresg investing as a big data game so at the end of the day it’s all about predicting future outcomesand selecting additional drivers to it now how relevant becomes buying externaldata versus doing your internal research i mean at the end of the data is toolas a tool and you need to apply it in in the right context so for instance if you umif you would look into equities then uh probably upside potential for the future so alpha potentialthat you can’t you can unlock using proprietary research is theoretically higher however thetransparency levels in developed markets is rather high whether it’s worthwhile putting an additionalanalyst resource on developed markets equities that’s to be seen right we know that activemanagers in developed markets do not necessarily tend to outperform passively managed uh strategieshuh and that’s because the data quality is high same topic equities emerging market mightbe different right so you look at the index performance if you compare a passive indicesuh in this case in emerging markets with the conventional one you don’t see the same picturethat you would see in the developed market so putting analyst resources there to unlock alphathat is clearly something that makes sense more in the emerging markets than in developedmarkets fixed income where you have also non-listed issuers it makes even more sense toput additional proprietary research behind it so it’s the use case uh the strategy determines yourinvestments but uh since the majority of assets uh right now also given the interest ratesthe focus is predominantly on the equity side the data game and combining data and tryingto unlock additional sources for alpha is is out there so there’s no surprise that themajority of larger asset managers and asset owners will have one i would say homebased data provider that they consider the primary data provider but neverthelessthey will not rely just on that they will kind of complement that with other data providersbe it for calibration reasons or or to figure out or get more ammunition to distill additionalinsights out of that that cannot be captured by each individual external data provideritself so means to ends that’s data but more data is required and i guess if youjust look also at the listed prices of equity prices of esg data providers just compare that tothe broad market you know where the game is going may i just follow up on this i think in whatyou just said there was something interesting with the distinction of develop versus emergingmarkets so would i then be correct as an investor to expect a sustainable investment strategy orany esg integration to deliver more positive returns or higher alpha in emerging marketsthan it would in developed markets so with that strategy is sustainable investing essentiallybetter in developed markets just because the information is there’s less information andwe’re getting more information on companies now in in absolute terms whether developed marketsare performing better than the emerging markets or vice versa that has nothing to do with esg that’sjust the fundamental business model of the region but within each sector uh proprietary data versuspublicly released data that makes a difference so uh i would phrase it differently saying i i wouldnot necessarily expect an additional analyst doing some research in developed markets toprovide the same amount of alpha compared to the same resource actually put into work uhanalyzing emerging market equities or fixed income issuers right so that would be my answer butequity versus fixed income that has nothing to do with sustainability uh that is just iwould say capital markets driven by by macro topics and they are not being changed by esgas such carson i i couldn’t help but look at some of the countries on the chart uh regarding theperformance of funds and uh and and what it does show is that funds equity funds and bond fundsthat that do have a focus uh sustainable funds tend to on average perform better and to lose lessthan conventional funds uh um do you think uh why do you think that’s the case i mean i mean soconsistently across the board is it the way that we define sustainability that really influencesthat figure more or is there a real value do you think for the investor and seeking out moresustainable investments well um i would say in general sustainable investmentsshould not necessarily create alpha especially not in in developed markets becausethe majority of information is incorporated if everybody does proper analysis work and assessesthe assets properly you should not be able to do so so why you see that so uh this is now a bit ofa guesswork so i cannot prove it but one suspicion i do have is you have a sort of a transitionalpha and one of these reasons is that right now uh a lot of institutional investors as wehave seen in the regulation or as part of the discussion about regulation and let’s let’snot fool ourselves right institutional investors control over 80 percent of global assets so theyare the driving force of where assets are going it’s not the individual investor that does that sothey have now the clear objective to become green or at least e and s environmental and sociallyconscious and consider more esg so that means they need to sell certain assets that are lessuh compliant to this new philosophy new standards and buy more of those assets that do and thisis exactly what you see here i think you see kind of a transition or the implicationsof a transition from a less sustainable world to a more sustainable worldand i expect these out performance to reduce over time that’s one that’s would be thephilosophical answer to it now if if you look at pure quantitative indications of that um what doesesg mean so what does esg correlate with when you talk simple factor investments and you see arather high correlation to quality to growth and over the last 10 years the good old discussionvalue versus growth was clearly won by the growth factor so uh since sustainable investments havea much higher exposure to growth and quality than these grayish conventional funds here that havea bigger exposure to value you could also argue this is because the growth factor in particularoutperformed the value factor significantly over the past decade i’m in discussion with ourportfolio managers and also third party portfolio managers they all keep telling me yeah but thevalue for decades has been the has been the driver and next year everything is is differentso value will come back and i always keep saying yes maybe i cannot predict the future but i’ma strong believer in the allocation implication of regulation and as long as the transition fromthe old world to our new regulatory world is not concluded as long as even more regulation ishitting the road uh i really have a hard time to believe that value is getting back in a iwould say a substantial uh and prolonged way so it will at some point in time for sure butprobably later than we all might expect and i can’t help but to add that the uk fund managersand equity funds do particularly bad don’t they why is that the case uh well i would not saythat these are the uk managers this is just funds dealing with uk equity and i guess ifyou look at particular the last three years i guess you need to look to downing street andwrite your thank you letters there thank you thank you carson um i’m conscious of time ummaybe i’ll give you the last word if you want to say maybe what investors the last piece of advicefor investors that want to invest sustainably what’s the way to go what’swhat does the future look like oh that is the good old question well uhpredicting the future is difficult and i think as an investor you need to makeconscious decision what you want to achieve what are your objectives and discussionsshould i invest sustainably should i stick to what i have until somebody tells me whatsustainability ultimately means so we have this looked for unified definition of sustainability asthey look forget it it’s not going to happen right you need to implement your conviction and what youshould do is you should quantify the implications of what you are doing to the letter you shouldnot follow any pursuit and say just because i see greta toonberg every morning demonstrating infront of my office i know should now be a climate investor if you want to do that you need to alwaysexplain why what do you expect out of it what is the main reason why you’re doing it and that’s whyi am allocating my my funds over there we have so many data already that would you can pretty muchimplement everything but coming back to my little thought picture about esg lego the buildingplan what you ultimately want to build that is your job as an investor then youknow i have lego stones they need to fit i cannot combine duplo with lego althoughi learned from my kids it’s possible uh however ultimately you should stick in one setof criteria that you’re considering you take you should take as much data as possible in orderto make a conscious decision how to implement and ultimately sustainable investment is notso complicated you have an asset allocation and a risk adjusted return or the capital marketassumptions behind are no different right compared to traditional investments so you you have yourallocation problem in the same form and shape than you had it before what changes is the selectionand the filter criteria how do i select assets to populate my strategic asset allocation or mytactical asset location that is where usg comes into play and this is driven by your convictionbut you are by by your thoughts and i always tell them look even greed although you wouldn’tnecessarily communicate like that being greedy is a legitimate legitimate objective right becauseyou can optimize short-term trends and actually capitalize on this transition alpha if you wantto and also a little fun fact as a sideline if you look at corporate disclosureswe talked about this supply chain topic you can also say there’s a un global complexand norms-based exclusions and if you just look at the alpha potential of for instance excludingalthough i said i’m not a big fan of exclusions uh excluding companies that fail certain norms lookat the gpfg the norwegian state pension fund they disclose the attribution of negative exclusionsand it generates alpha right and then if you would advise a client and say look uh just focus onfor the sake of simplicity or negative exclusions and then you look how they communicate what theydid there’s a complete different narrative behind it from where we start of which was maximizealpha be greedy and this is what you need to consider how do i communicate what do i have tocommunicate what are my objectives and the rest is pure mechanics so so don’t shy away from doingit and don’t wait for somebody to tell you what is sustainability you will never get that answer atleast not in my remaining lifetime i probably fear just do it i hope the call to action is heard andmany who will implement their own strategies and communicate them accordingly as you say so carsonthank you very much for these insightful comments and insightful presentation and uh for standing infor all the questions some tough ones um so thank you very much that’s a great great interestingvery interesting topic obviously very timely and hopefully we’ll see more action in thisuh moving in this direction and more funds invested in more sustainably for all ourfuture so thanks everyone for tuning in thank you for your questions and we willum continue with with other webinars uh in in the future stay tuned thank you verymuch again question for for joining us thank you for having me have a good afternoonbye bye thank you bye-bye thank you bye

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