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 title waiting one a few cases more seconds forparticipants to join and then we’ll kick off great well everyone is still joining well welcometo this third of our webinar lines for the bank governance program it’s a it’s a pleasure toto have everyone on this call and to have more players assembling as we go along my call isamir amelzade i’m one of the co-directors of the bank governance program at locations other than construction sites businessschool university of oxford and together with colonel alexander who is also on this call and drcarson gliddler our loudspeaker today who current will be presented by in a few seconds 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 enormou discussion and insights um so this seminar today as i said about esgand speculations or sustainable investing um as a broader sense and we will hear soon fromfrom dr castling at the moment i will hand over to the co-director kevinalexander to introduce our loudspeaker thank you amir and uh it’s please to for to havethe third seminar in our bank governance program uh at the outset i’d like to likewise uh acknowledgethe helpful support of the research network of sustainable finance uh here in zurichand the swiss bank association uh through which we have been engaging with ourdiscussions on developing summits and uh webinars and so we’re very happy today that we have drkirsten goodler with us who is has extended ordeal in the area of bank and assetmanagement of course when we talk about asset management we sometimes think of blackrock andthe big-hearted asset conduct corporations but also we we tend not to focus so much on what the bigbanks are doing big banks like ubs recognition swiss barclays they have large-hearted asset administration divisionsand so we’re very happy that today we can have uh karsten gupter discussed with us uh carson issenior financing expert within the ubs asset control department he is responsiblefor representing the sustainable investing capabilities of ubs to their institutionalclients prior to joining ubs carsten operated in ubs’s wealth management division and he was therehe was head of sustainable and impact investment and dispensation uh before connecting ubs uh carstenworked for commerce bank in 2011 uh he also worked with credit suisse private bank in zurichand he worked with the boston consulting radical so he’s got a lot of suffer with other banksand what they’re doing in the area of investment strategy and sustainability and he’s currentlythe senior financing professional with ubs asset handling we’re very pleased to have carsonhe he has a doctorate uh in entrepreneurship from university in germany and he also has a masterof discipline in financial engineering and sell from the uh from the university of brantfordand also a master of science from leipzig grad school of management so he has immensebackground both educationally and in working with some of the leading international financialinstitutions in the area of asset administration 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 place andthank you for the opportunity to be speaking about a topic that is pretty dear to me not onlyprofessionally but also from the path i believe investments should play important roles in in societyso this is not only due to the fact that i have three children “whos doing” pestering me prettymuch from morning till night that i do more in terms of uh societal returns so we speakabout that in a bit so thanks again and i would say let me give you like a 15 -minuteintroduction how i see sustainability evolving what are the operators behind it what are the mostrelevant influence parts 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 exhibition 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 ideology and practise these are thetwo main chapters of what we will discuss today around sustainable assets so and if we startwith the presumption so what is sustainable investment in general not only for ubs asset administration soat the end of the day what sustainable investments talk about on a longer term view on returnand probability so we define the risk and the return ingredient 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 assets if you are able to 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 numerous 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 monarches at governments in order to evaluate what drives their sustainability returnsorry uh sorry to interrupt um we still see your your um primary the breast slip it seemslike the moves are not converting i think we’re currently just seeingthe firstly slip 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 factor 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 speculations over the past coupleof years and you attend 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 radicals one or pricewaterhousecoopers wealthman radical with rf studies you will find thatconventional assets they ripen at a speed at a rate of six percentage per annum and i said sustainableinvestment grow more than twice of that and this is true for pretty much every region youcan see that now on the right hand side and here i am thinking the battery-acid rise as such is right nowpredominantly driven by institutional investors and what is driving the behavior of financialassets so the payment appropriations 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 rather withactual speculations or exposures in the context of esg you see this is a awesome chart andit has impact as you have seen in the previous time slide mention a attitude 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 strategies across the boardincluding the us and i think this has a broad influence on what institutional investorsand also banks have to do keyword now and idd the insurance distribution directivethat will lead to institutional investors and banks and asset managers and also insurancecompanies expecting 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 division 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 merely one-fifth of the endowed cornerstone says yes uh well want uh to invest andactually get it on i set my fund where my mouth is so more than one percent of sustainableinvestments dedicated to esg assets 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 amounts are not even higher because if you usually expect soul do you behave or investsustainably or do you like sustainability then pretty much everybody will say yes but seeminglynot everyone gives the money right in my bureau and one of the key motorists you understand on page 8 is thatthe terminology that’s being used is pretty much confusing you have a multitude of different termsthat are sometimes expended 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 devote 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 ideas 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-wide now there’sa second uh question what does sustainability make 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 who really analyze tesla so on the left hand side you will findmsci esg research with their appraisal on the right hand side or the number two in the spaceso stanalytics and they look at sustainability from various driver positions but the conclusionis completely opposite if you would believe what msci is saying would say it’s a magnificent companyit’s a 7.1 on the scale from 0 to 10 with 10 being the best and relatively 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 nothing actually reasonably says yes this is sustainable and thisis not these are the standards we need to apply then extremely 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 difficulties 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 place so first of all is transparency i guesstransparency is one of the most important things in sustainable speculations 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 approachings how you think about sustainability when itcomes to investments and these can clearly then later be combined but but what are whatis the gist of it first the far-famed 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 carrying despise one is based on a commodity so i don’t like alcohol idon’t like tobacco and you envision previously 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 located exclusions and criterion spaceis not about what you produce but rather how you produce it so if you just takei would say a water purification seed and it made the most fantastic uhcompletely force neutral cleansed ocean but regrettably you apply childrento actually increase 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 determine already in the mid if you look at the market size it’s asbig as the exclusionary aspect this is kind of allocating a certain value at risk a certainrisk budget to esg risk so you kind of share your risk budget to not only fiscal is thetraditional one that where we all know how to analyze it and quantify it but also utter it a bitspace in terms of years your risk and then you can think about one big year lines so do i want tohave one big company that is quite controverse but i think the potential future bestow may compensatefor it or not or i take little ones or make none now and that’s also the difference now we go intoone of the strategies that you mainly find in the private investor infinite sustainability focusthis is about minimum rules so you set forth clearly what is a minimum standard irrespective ofwhether not adhering to it might even honored you to a greater extent financially but you say thisis what i like this is where i invest and there is the red indication i don’t sweeps it and impactinvestments croaks even one pace further because it really 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 added clean-living sea 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 epoches because ofactually polluted irrigate so quantifying that means you need precisely not to know what produces are outthere but also where they are being distributed and then the stewardship this this votingengagement is supportive supportive activities in order to manufacture companies and government changeover time and it’s uh eventually 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 “its certainly true it is” what often private investorsthink about when they invest in a diversified portfolio from us with a sustainability focusso it means you have the exclusions work based you have norms based exclusion which iscalled single company exclusions for instance the u.n world-wide pact is important you haveesg ratings that need to be better compared to a certain conventional reference point on theother side place too a better co2 profile ie your firms in your portfolio you needto emit little co2 for what they produce last but not least there need to be a clear activeengagement a stewardship ingredient is connected to it so that there are certain societal sequels thatare promoted with the resources that you’re controlling so how do you go about that from theinfrastructure place patently 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 fellowships like the ones we have seen for instance msci is geo researchor social analytics but this is usually precisely public data that is kind of being realise 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 appearing and that’s why in proprietary study every asset managerevery wealth administrator does that this is way less small amount of gauges that you’re lookingat but they need to have a much higher predictive authenticity because you will be honored forfuture returns and this is where these kind of internal appraisals are geared towardyou really one example for a fixed income research piece and you benchmark it you calibrateit and ultimately the legality is here the key the key objective and then aside from that youmonitor likelihood we spoke esg desegregation as a risk management tool what i’ve shown here isjust an example of the in principle workings of our esg jeopardy dashboard so we take a multitude ofdata in their our own as well as third-party data there are different motorists 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 accidents is thissector is much more prevalent for instance in um in the application area and this then sends outthe risk signal and will vary depending on what backbone 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 impels ultimately the difference and last pointthat i want to clear 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 regardless of whether your strategyan individual level is managed against the framework but uniformity 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 chart you check carbon emissions you look exclusionary criteria located as wellas product base and you verify even the sdgs in a combined style and then you have againthose five criterias you promise something you deliver against it and you admit a thirdparty to judge to be the adjudicator 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 operation uh there’s always been this discussion and debate about isthere a kind of a settlement that you have to like a trade-off between esg sketch and financialreturns so what i’ve done here is on this slip and i hope you can counts are rather big thisis a one year three time and five year uh return average of equity funds and bond funds across thewhole morningstar universe that conveys all stores that are allowed for distribution to privateinvestors in europe are kind of categorized into equity us or ligaments global usd or emergingmarkets out currency and then they are compared against the conventional counterpartsin exactly the same segment so gray is conventional store red is the the esg fundsand what the hell are you watch one year three year five year uh you do not definitely need to fear thatsustainable investments do underperform as to 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 are able to expect the samerisk adjusts it returns with the additional benefit the plus being a societal impact and thatdepends on how you construct your sustainability lego with that i hand back to our moderators forthe q a discussion great well thank you uh karsten much needed certainly for a particularly insightful andthoughtful uh present uh discussing the ideology 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 motorists in the process of developing sustainable financing practices and we witness 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 agreed international regulatory approach to sustainableinvestment we see now that many national authorities like the us china uk switzerland havevery you know differed approachings do you think that regulation could play a more useful role if itwere more linked up or maybe more harmonized yeah there’s there are two stomaches here overpowering nowin my dresser so uh when it is necessary to if the primary objective was to channel and allocate as fastas possible as much as as countless as as is practicable to a common goal for instance let’s do climatechange let’s talk about cyberspace 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 chase resources that are at some station in time rather scarce then you willhave a highly probability uh high probability that “youve had” misallocations of of assets so youwill have assets costs that have nothing to do with reality they will only 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 characterize exactly how we appraise it uh time to avoid these misallocation effectsso uh i instead have three or four more times where people are saying uh maybe i still don’tknow more i need to find my nature or maybe even use the asset overseers the abundance overseers inorder to give feedback what they think because they all have different perspectives thenif every sector does it in an aligned style but somewhat different then the danger of being subjected to kindof these unwanted side effects is probably a little more mitigated and i think this is two or threeyears of more distraction well endowed expressed appreciation for 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 cavity is so then so this disconnect between institutionalinvestors and institutional produces and and private speculation so then the question i haveis um so where does the agnosticism then come from because as you also said your childrenare propagandizing you to do something for for a society and in the environment so itseems like the the newer generations are pushing previous generations to alter wealthalso into into the sustainable products so so is it that we’re still skeptical about thereturns is it the confusion that is constituting us skeptical or is it the agnosticism 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 back invested sustainably oneis being this confucianist terminology uh topic and that is exacerbated or constituted even worsebecause the majority of advisors they are not yet so pleasant in advising their clients aroundsustainability because they’re facing exactly the same challenge they need to somewhat sidewith a deem on esg on sustainability be it on the data side be it on the norms side i entail 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 make if you ask a frenchman about the sustainability profile of nuclear energy youwill get a complete different answer if you then you are able to 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 endow accurately 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 occasion 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 too meet a getaway in the private investorspace once a investor private investor has done it they identify the implementation of its they see what’s happeningthat’s and then actually you realise the resources spurt in the second part is also very valid pointwhat is the actual impact so we’re talking this impact bucket that “youre gonna” mentioning soquantifying societal return of your investments and this is a bit uh of significant challenges becauseit’s expensive it’s it’s not goal hopeless it’s actually much needed possible but it’s superexpensive and if you i would say offload and allocate cost for influence amount to a certaininvestment approach then it will underperform so either you shy away from appraising it and that’sright now still developments in the situation for the majority of asset managers you are only don’t do it you treatimpact investments like an r d bureau even like a humanitarian asset so you exactly 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 extra 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 purchaser 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 gathering there’s a few coming in and so there’s one question on it asks how beneficial is an esg consensus scorewouldn’t it negate the usefulness of contrarian esg scene 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 composes arewe not only creating virtually another trouble yes exactly yeah i fully agree i meanthis is exactly my extent 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 motorists 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 facets are relatively seen in each sector to assess a certain company uh they aredifferent then then if you make that into account and combining it and i would say three out offour input parts based on terminated different ideas 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 fellowship 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 groceries 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 authenticity i’m not saying herethat is the case we’re just saying accepting it so uh then you meet your investmentdecision accordingly and follow the itinerary 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 really one exactly oneindication how things should play out um carson i thought i might was asked havingto do with the role of the uh of the investor um you had mentioned earlier in the practice ofinvesting uh and “youve had” parted it into exclusion integrating focus uh and affect and it reminds mea bit of the corporate governance debate between departure and singer you know what is more effectivein improving governance and do you have any dreams on that i represent how should what doyou think the investor for example might be more profitable by being moreproactive or should they just simply have a more exclusionary programme of relyingmore on departure yeah well this running for the doors approach i’ve never been a big devotee 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 only because i don’t see this nowit’s gone uh that is not necessarily an approaching i i do pretty much buy into so being a responsibleinvestor necessitates agony it’s not so easy to be disposed of any challenge just by closing your eyes orhitting the maroon button on your trading terminal so uh it’s a unpleasant 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 behavior of doing my business uhso why would i change but it’s definitely i know that from from the engagement planneds that wehave with fellowships it’s a pain process for both parties right because at the end of the dayit’s like holding 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-hearted amusing and booking “theres been” somethingwhat you can do is is you can criterion whether successful commitment 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 framework of clima and obviously it’s not a dark-green companyright so nobody would dare to claim that nonetheless uh there is an initiative a combined shareholderaction strategy called uh environment war 100 and they employed shell and culminate of 2018 i think wasthis eighth of december 2018 uh published that they truly want to go net zero going forward umand they want to reduce their footprint and they actually connected the compensation of the boardagainst that and if you precisely gape 2019 and 2020 what the hell happened how they adapted their businessmodel it’s a somewhat a different fellowship now than it used to be at the end of 2018 so changehappens and likewise societal returns will happen now question is did potential investors too gain somethingout of it because at the end of the day investors are not philanthropic or kindness right and nowwhat what is the alternative that you can do as overseas investors what alternatives do you have so uh shellis one you believe in the alter tale you vest 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 idiocy i don’t believein that i buy exxon so and if you really look at the performance outcome after announcementof these commitment such programmes and not apparently 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 outshone exxon so it was a good speculation andagain not every investment in this case will turn out that positively but invest in positive changethat is something that usually has worked in quite a significant number of cases and again the capitalmarkets they reinforce 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 the hell are 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 commitments on ens issues and a collaborator ofmine uh here at saeed is looking at um shall their decides for ens issues and witness 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 is impossible to 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 furnish bond should firms entrusted with responsibilities for their render orders 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 make reputational threat is also sort of a component of the valuation and ofthe risk assessment that should not be forgot at all and if typically something goes wrong ittends to be in the supplying order down the road because these are usually rising marketsuppliers less opennes restraint is at best below average if at all and it poses a significantrisk to companionships right is it directly feigning 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 careful investor is always educated 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 related is probably a good opinion so enter yourquestion uh should a should responsible investor take into account what happens in the give chaineven n minus two not only 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 permission to operate is not just aboutvaluations is also about what does that planned and “youre supposed to” gave it into the context of timeif you would look at what happened right now in college of atmosphere 15 several years ago nobody wouldhave ever travel out on the streets and actually a protest against global warming but this is now acase so environmental topics feign 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 meet 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 render series and well the first step into thatdirection but again prepare now collect the data as soon as possible not certainly use it alreadyfor valuation but be prepared is the best thing you can do and supply series topics should bealso and there are already too an element in the engagement discussions we have with a coupleof companionships but certainly 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 resource 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 generators 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 too trust on third-party sources of data regarding sustainable ingredients yeah wellit’s a very important a very important question because whatever you do eventually even data is aninvestment and what what happens more and more is that you could consider sustainable investments oresg devoting as a big data game so at the end of the day it’s all about predicting future outcomesand selecting additional motorists to it now how related becomes buying externaldata versus doing your internal study i signify at the end of the data is toolas a tool and you need to apply it in in the right framework so for instance if you umif you would look into equities then uh probably upside possibilities for the future so alpha potentialthat you can’t you can open abusing proprietary investigate is theoretically higher nonetheless thetransparency ranks in developed business is rather high whether it’s worthwhile lay an additionalanalyst resource on developed business equities that’s to be seen right we know that activemanagers in developed marketplaces is not consequently tend to outperform passively administered uh strategieshuh and that’s because the data quality is high same topic equities developing marketplace mightbe different right so you look at the indicator recital if you compare a passive indicesuh in this case in developing business with the conventional one you don’t see the same picturethat you would see in the developed market so putting commentator sources there to open alphathat is clearly something that moves impression more in the emerging markets than in developedmarkets fixed income where you have also non-listed issuers it acquires even more sense toput added proprietary study behind it so it’s the use case uh the policy defines yourinvestments but uh since the majority of assets uh right now also given the interest ratesthe focus is predominantly on the equity place the data game and compounding data and tryingto open added sources for alpha is is out there so there’s no surprise that themajority of big resource managers and asset owners will have one i would say homebased data provider that they reviewed and considered the primary data provider but neverthelessthey will not rely simply 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 predicts if youjust look likewise at the registered expenditures of equity prices of esg data providers exactly 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 separation of develop versus emergingmarkets so would i then is true as an investor to expect a sustainable speculation strategy orany esg integration to deliver more positive returns or higher alpha in emerging marketsthan it would in developed markets so with that approach is sustainable investing essentiallybetter in developed groceries only because the information is there’s less information andwe’re getting more information on corporations 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 liberated data that makes a difference so uh i would phrase it differently saying i i wouldnot definitely expect an additional analyst doing some research in developed groceries toprovide the same amount of alpha compared to the same resource actually put into work uhanalyzing emerging busines 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 business 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 stores equity stores and bond fundsthat that do have a focus uh sustainable stores 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 represent soconsistently across the board is it the path that we define sustainability that are actually influencesthat figure more or is there a real value do you think for the investor and striving out moresustainable speculations well um i would say in general sustainable investmentsshould not undoubtedly create alpha extremely not in in developed groceries 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 surmise 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 dominance over 80 percentage of world-wide resources 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 light-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 resources that do and thisis exactly what you see here i think you interpret kind of a transition or the implicationsof a transition from a less sustainable world to a more sustainable worldand i expect these out execution to reduce over duration that’s one that’s would be thephilosophical answer to it now if if you look at pure quantitative the indicators of that um what doesesg conveyed so what does esg correlated with when you talk simple factor investments and you picture arather high correlation to quality to growth and over the last 10 times the very best aged discussionvalue versus emergence was clearly earned by the growth factor so uh since sustainable assets havea much higher exposure to growth and caliber than these grayish conventional funds now that havea bigger exposure to value you could also argue this is because the growth factor in particularoutperformed the price influence vastly over the past decade i’m in discussion with ourportfolio managers and likewise third party portfolio overseers they all keep telling me yeah but thevalue for decades has been the has been the move and next year everything is is differentso value will come back and i always continue 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 life 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 road it is therefore will at some phase 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 stores do specially bad don’t they why is that the event uh well i would not saythat these are the uk directors well monies dealing with uk equity and i guess ifyou look at special the last three years i guess you need to look to downing street andwrite your thank you words there thank you expressed appreciation for 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 individual tells me whatsustainability ultimately makes so we have this looked for merged description of sustainability asthey look forget it it’s not going to happen freedom 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 simply because i see greta toonberg every morning demonstrating infront of my place i am aware 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 monies over there we have so many data previously that would you can pretty muchimplement everything but coming back to my little reflect illustrate about esg lego the buildingplan what you eventually 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 adolescents it’s possible uh however ultimately you should stick in one setof criteria that you’re considering you make you should take as much data as possible in orderto make a self-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 liberty is comparable to traditional investments so you you have yourallocation problem in the same form and condition than you had it before what varies is the selectionand the filter criteria how do i select assets to colonize my strategic asset distribution or mytactical asset location that is where usg comes into play and this is driven by your convictionbut “youre ever” 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 modulation alpha if you wantto and likewise a little fun fact as a sideline if you look at corporate disclosureswe talked about this afford order topic you can also say there’s a un world-wide complexand norms-based exclusions and if you only look at the alpha possible of for instance excludingalthough i said i’m not a big fan of exclusions uh omitting firms that flunk sure-fire norms lookat the gpfg the norwegian position pension fund they disclose the attribution of negative exclusionsand it generates alpha right and then if you would advise a patron and say appear uh really focus onfor the sake of simplicity or negative exclusions and then you gape 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 auto-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 life-time i probably fear merely do it i hope the call to action is heard andmany who will implement their own programmes and be transmitted accordingly as you say so carsonthank you very much for these insightful comments and insightful present and uh for standing infor all the questions some hard ones um so thank you very much that’s a great great interestingvery interesting topic plainly very timely and hopefully we’ll learn more war in thisuh moving in this direction and more funds be used 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 aria thank you verymuch again question for for connecting us thank you for having me have a good afternoonbye bye thank you bye-bye thank you bye

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