Structured products in focus as UBS pushes ‘climate aware’ cross-asset suite

UBS has boosted its Climate Aware framework, part of its Climate Aware passive equity strategy launched in 2017, with a broader suite of investment strategies including active and passive, equity and fixed income to align its offering to the required building blocks of most portfolios.

The new cross-asset class suite of products, launched in in mid-September, supports clients in aligning their investment and environmental goals.

Given how a company's ESG attributes are becoming more important as evaluation criteria for investors, ESG factors are likely to increase in significance as return drivers, according to Spyros Mesomeris (pictured), global head QIS structuring and global head of quantitative and global investment solutions (GIS) research at UBS.

There are still challenges around defining what ESG is and creating widely acceptable standards

“We already have encouraging results on this - as data sets which quantify such attributes proliferate in the marketplace, there will be new ways to assess the quality and potential future profitability of companies,” he told SRP. “Traditionally this assessment was done based on accounting metrics, but this is changing. There are still challenges around defining what ESG is and creating widely acceptable standards, but there is clearly a trend towards looking at ESG factors when assessing companies.”

The framework is based on portfolio mitigation by lowering investment exposure to carbon risks; portfolio adaptation through increasing investment exposure to climate-related innovation and solutions; and portfolio transition aligning to a chosen climate glidepath.

“We’re working very closely with our wealth management and asset management divisions on creating a universal data framework for the whole UBS group, whereby the different divisions will have access to an issuer-level database by the WM CIO office,” said Mesomeris. “This will enable us to compare company rankings, analyse ESG quality, and thus help develop new ESG-focussed solutions.”

In January 2019, UBS announced it was piloting a service called Advice SI that enables private clients to tailor investments targeting six separate areas of sustainability - this is a more tailored approach than the 100% sustainable portfolio as it targets all areas of sustainability simultaneously. In January 2020, the Swiss bank confirmed the pilot was successful and Advice SI would be a permanent service. 

Preferred recommendation

UBS, which manages approximately half US$0.5 trillion in core sustainable assets across all its business divisions, is also making sustainable investments the preferred recommendation for clients of its US$2.6 trillion global wealth management business. It is the first major financial institution to recommend sustainable investments over traditional investments for private clients investing globally.

We see ESG as an integral part of the IB product offering

While traditional investments will remain most suitable in some circumstances, the Swiss bank believes a 100% sustainable portfolio can deliver similar or potentially higher returns compared to traditional investment portfolios and offer strong diversification for clients investing globally.

“We see ESG as an integral part of the IB product offering which can be delivered via different outlets such as QIS,” said Mesomeris. “As we revamp our equity product suite, one of the areas we are delving deeply into is new factor-based and systematic strategies which can combine equities but also credit.”

In the year to date, major sustainable indices have performed better than traditional equivalents, according to the bank. However, as the CIO of the private bank Mark Haefele stated recently ‘not all sustainable investments are created equal’.

As new underlyings for structured products are developed, there are a number of parameters to consider.

“You need to take into account not only the thematic side of things but other intricacies such as hedging, tradability as well as the volatility and dividend parameters,” said Ahmad Chaudry, executive director, markets structuring, ESG at UBS Investment Bank. “Our view is that although it is important to offer choice and develop a comprehensive offering you have to be careful not to over engineer underlyings which could result in over allocating or over exposing yourself inadvertently or by design to particular risks.

“As a manufacturer of products and indices, you have to be aware of those pitfalls. Notwithstanding, we believe ESG will continue to grow in size and popularity among structured products investors.”

Structured products

The launch of the Climate Aware suite comes almost five years after the Swiss bank entered the ESG retail structured products space by licensing the Dow Jones Sustainability Europe Diversified High Beta High Dividend Index as the underlying for a series of index-linked products marketed in Europe.

The bank believes structured products “are playing and will continue to play” a key role in providing access to ESG strategies.

“We see increasing activity around ESG and structured products in the market,” said Chaudry. “We have been working on several initiatives over the last few years and we plan to continue developing our capabilities and product offering in this space via indices and index-linked products.”

In 2017, UBS Investment Bank rolled out a series of investment products aligned to the 17 UN Sustainable Development Goals (SDGs) which allocate a pre-defined portion of proceeds to its dedicated philanthropic UBS Optimus Foundation.

Shortly after the Swiss bank released the first 100% sustainable cross-asset portfolios for private clients, targeting market rates of risk-adjusted returns as well as positive social and environmental outcomes. It entered into a partnership with Solactive to develop the Solactive UBS Development Bank Bond Index Family, a new suite of financial benchmarks targeting the World Bank and other high-grade development bank debt.

In late 2018, UBS rolled out a structured note issued by the World Bank's International Bank for Reconstruction and Development to support its sustainable development activities.

The note is a seven-year growth uncapped structure that will pay at maturity 105/115% of the positive performance of the Global Sustainability Signatories Index 7.5% VC ER, which provides exposure to up to 100 UN Global Compact Signatories selected according to their ESG ratings from Sustainalytics.

According to SRP data, the Swiss bank has three live products including the Green Bond Notes Ethical Europe Equity, an enhanced tracker structure in the US issued by the World Bank linked to the Solactive Ethical Europe Equity which will mature in 2025; the Elios O2 ESG Eurozone II 2020 in France - a knockout/protected tracker issued by BNP Paribas linked to the performance of the Euronext Eurozone ESG Leaders 40 EW Decrement 4% Index which will mature in 2030; and a leverage short with stop loss product in Germany linked to  the FTSE4Good Europe 50 index.

UBS trails a number of other players more active in the ESG retail structured products market such as Société Générale, BNP Paribas and HSBC.