UBS invests in sustainability for financial and societal return

Banking came into its own in the first industrial revolution. Banks were the intermediaries between the people with money and the ideas and opportunities of the community they served.

Now, says UBS’s Global Head of UBS and Society, Caroline Anstey, it is time to remember this. “Towards the end of the Twentieth Century, finance became in many ways a sector in its own right, often divorced from the real economy and eventually helping to prompt the financial crises of recent years. This has lead to a lot of soul searching.”

Banks, she believes, have not just the means, but also often the skills and the responsibility to help lead a debate on the challenges facing today’s society, especially when those challenges require a financing solution. This is often the case in areas where financial innovation is needed to spur investment, for example in vaccines in emerging markets, or green infrastructure, or sustainable energy for all. “These are challenges where banking can play a lead role.” says Anstey. As a former Managing Director at the World Bank, her background is in development and she is passionate about it. “Banks need a societal, as well as a legal, licence to operate,” she says.

As a global company and the world’s largest wealth manager UBS, Anstey believes, is in a unique position to develop innovative financial approaches that generate benefits for both clients and communities.

Thus, UBS launched a cross-divisional platform, UBS and Society, in 2014, covering all of the firm’s activities and capabilities in sustainable investing and philanthropy, environmental and human rights policies that govern client and supplier relationships, the firm’s own environmental footprint, as well as its community interactions. The development of financial initiatives that address societal challenges such as climate change, deforestation, biodiversity, healthcare education, and human rights fall under one umbrella, creating a holistic approach that helps to ensure that sustainability becomes an everyday standard throughout the bank – in its advisory, research, investment, finance and ownership processes – and part of every client conversation.

Using sustainability as a yardstick, recent innovations include the first impact investing fund focused on small and mid-sized enterprises (SMEs) in developing countries, incorporating loss protection for private clients, and the first clean energy infrastructure fund in Switzerland.

And in 2014, the bank’s child-focused Optimus Foundation partnered the Children’s Investment Fund Foundation (CIFF) to launch the first ever Development Impact Bond (DIB) as a ‘proof of concept’ – to show potential investors how development impact bonds can contribute to societal gains while still offering financial returns. The Educate Girls DIBs demonstrate an investment 100% tied to outcomes while at the same time improving education for 18,000 children in Rajasthan, India, and bringing returns to investors.

Many of these activities – and more – are reflected in UBS taking over the leadership position in the Diversified Financials industry group of the Dow Jones Sustainability Indices (DJSI) in 2015. The Industry Group Leader report for UBS cites, among other relevant aspects, the firm’s support to clients and communities and its integration of societal and financial performance.

The bank is responding not only to societal challenges, but also to client demands. “There has been a huge change in the social dynamic,” says Anstey. “We see this in the world beyond banking, in movements like Fair Trade and organics, for example, in attitudes towards the environment and social needs. Young people want to make a more deliberative choice in how they spend their money, even who they work for.”

Now a staggering $38 trillion, in the US alone, is due to pass from the hands of the baby boomers into the hands of the Millennials (those born between 1980–2000). “A new generation is taking charge of the world’s wealth which has made us, as bankers, aware of what doors we can open.”

The growing share of investable income that is now held by women is also having an impact. We shouldn’t generalize too much, she says, but there is evidence that women tend to be more risk averse and look for long- rather than short-term value, focusing on sustainable and values-investing.But this isn’t just about young people or about women. It is more fundamentally about changes in how people view their own roles and their own power to influence their societies. And interestingly it is affecting both philanthropy and mainstream investing. Many of today’s philanthropists want more control and leverage over their giving, to move beyond cheque writing to more hands-on investing where they can measure the impact they are having. This has helped spur the growth of Impact Investing.

At the same time mainstream investors have begun to see that as societies take on these social and development challenges you can have both a financial and a social return and that very often that financial return can outperform a traditional investment. And what that means is that the old trade off between doing good and doing well is increasingly invalid, says Anstey. The stigma between the two has broken down and it is now accepted that finance has a role in sustainability with returns. And that is beginning to bring Impact Investing from a fringe to a mainstream activity, giving it an increasing appeal to mainstream investors. After all, if you can combine financial with societal returns, with no trade off, why wouldn’t you?

But perhaps the biggest positive change Anstey has seen is the breaking down of the barriers between public and private investment.

Anstey’s address to the last UN Financing for Development conference was the first time the private sector had been invited to talk at the conference plenary. “Many people in the development community had this idea that issues such as education, health, water scarcity etc., were the responsibility of public money, governments, and that involving private money somehow diluted the objective of doing good. Now, it is accepted that there isn’t enough public and aid money to finance today’s societal challenges. We need financial incentives to get private money involved. Social impact bonds, green bonds, vaccine bonds, for example, can bring private resources to areas of traditional government funding.