September 28, 2020 BARRON’S 27
UBS says that 72% of such funds were
in the top half of their Morningstar cate-
gories in the first half. Similarly, MSCI’s
“ESG Leaders” indexes outpaced con-
ventional indexes in that period.
Clients want socially-conscious in-
vestments; 62% of family offices sur-
veyed by UBS believe that “utilizing
impact investing is important for their
legacy.” So, the bank’s wealth managers
will be quick to discuss sustainable
investing with clients, rather than wait-
ing for them to raise the subject.
Since the 2008 financial crisis,
UBS has transformed itself into the
world’s largest wealth manager, while
cutting exposure to cyclical and capi-
tal-intensive investment banking.
Of its $2.6 trillion under manage-
ment, $488 billion is in sustainable
investments. The bank has burnished
its own sustainability cred by buying
carbon offsets for business travel. And
it’s been asking potential third-party
asset managers—those it makes avail-
able to clients on the UBS platform—
about diversity and inclusion practices.
The Covid-19 pandemic and the
woes it’s cast a brighter light on—in-
come and racial inequality among
them—have raised environmental, so-
cial, and governance investing as a way
to reduce risk and to tap into compa-
nies grappling with these issues. The
time had come. The technology had
improved, and UBS had a full suite of
potential ESG investments “across all
asset classes,” says Andrew Lee, head
of sustainable and impact investing at
UBS Global Wealth Management.
The company’s expanded fixed-in-
come options now include portfolios
through which fund managers can en-
gage with issuers to improve ESG. And
there are new options in private equity
and private real-estate markets. “The
business was ready, our clients were
ready, and people were ready to start
implementing the investment case we’ve
been making for some time,” says Lee.
The table on this page shows a typi-
cal account for a moderately aggres-
sive taxable investor. That person’s
fixed-income portion might include
multilateral development bank bonds,
such as those issued by the World
Bank; municipal bonds that fund proj-
ects with social and environmental
objectives; corporate green bonds that
finance environmental projects; bonds
issued by companies that simply man-
age sustainability well, and “ESG en-
gagement high-yield bonds,” with
which fund managers actively work
with issuers to improve environmen-
tal, social, and governance scores.
Alternatives, such as sustainable in-
frastructure, real estate, and private-
equity holdings are available.
UBS has said it will also recom-
mend sustainable investments to its
401(k) clients, although this is a minus-
cule part of its business. The bank
doesn’t regard its guidance as conflict-
ing with the Labor Department’s un-
popular proposal that would discour-
age 401(k) and other qualified
retirement plans from offering ESG
funds. That is because it believes,
among other things, that sustainable
funds can outperform traditional in-
vestments and that ESG is a critical
tool to manage risk.
The move may be copied by wealth
managers like Bank of America Merrill
Lynch, DWS, and Morgan Stanley,
which see sustainable investing as criti-
cal to growth, analysts say. Says Ian
Simm, CEO of Impax Asset Manage-
ment, which has the Pax World funds:
“I would expect others will follow.” A
DWS spokesperson observes: “This
reality is not new to us, and frankly, we
are glad to see others taking note.”
BAML and Morgan Stanley weren’t
immediately available to comment.
Will UBS keep its first-mover ad-
vantage? Ultimately, as with all invest-
ments, it “will need to show perfor-
mance first,” says Johann Scholtz, a
Morningstar analyst. “The winners
will still be the players that can deliver
the returns demanded by their clients,
preferably in a sustainable way.”B
Sustainable
Investing
GetsaNew
Champion
UBS, with its $2.6 trillion in assets,
will recommend ESG investing to its
clients, although the Labor Depart-
ment is skeptical of it in 401(k)s.
though other companies already have
substantial sustainable practices.
In 2020’s first half, asset flows into
sustainable investment funds hit $1
trillion-plus, matching the total for all of
2019, and easily beating 2018’s $600
billion, says UBS. And sustainable in-
vestments have outpaced the market.
UBS’ Sustainable Portfolio
Here is the asset allocation for a taxable
investor who is moderately aggressive.
UBS’ model sustainable portfolios range
from all fixed-income to all equity.
Cash 2%
Fixed Income 25%
MDB Bonds 8
Sustainable Munis 9
Green Bonds 2
ESG Inv Grade Corp 3
ESG Engagement HY 3
Equity 73%
ESG Thematic Equities 23
ESG Leaders Equities(US) 15
ESG Leaders Equities(ex-US) 14
ESG Improvers Equities 8
ESG Engagement Equities 13
Estimated Return 5.37%
Estimated Risk 11.15%
Source: UBS
“The business
was ready,
our clients
were ready,
and people
were ready
to start
implement-
ing the
investment
case we’ve
been
making for
some time,”
Andrew Lee
T
his month, UBS made a
groundbreaking move,
announcing that it would
recommend sustainable
investing over traditional
investing to clients around
the world. The big Swiss
bank would even recommend it to
retirement plan clients—a move that
raised some eyebrows, given that the
U.S. Labor Department is weighing a
rule that would limit environmental,
social, and corporate governance, or
ESG, options in such plans.
Yet the decision by UBS (ticker:
UBS) is likely to be followed by other
wealth managers, some experts say.
“This is a great first-mover advantage
in the chess match of ESG investing,”
says Jeff Gitterman of Gitterman
Wealth Management, which has offices
in Manhattan and New Jersey.
“It’s a game-changer like Larry
Fink’s statement” in 2018, in which
the BlackRock CEO said that “to pros-
per over time, every company must
not only deliver financial perfor-
mance, but also show how it makes a
positive contribution to society.”
For UBS, it’s also good business.
“I wholeheartedly believe this makes
the client stickier,” says Glenn Schorr,
who covers wealth management for
Evercore ISI. “An average dollar in a
mutual fund these days lasts a year and
a half. The duration of a dollar in a
wealth-management account is mea-
sured in decades.” Eventually, that will
translate into stronger revenue, al-
By LESLIE P. NORTON
Illustration by Anders Wenngren