Following the launch last week of a series of investment products aligned to the 17 UN Sustainable Development Goals (SDGs) by UBS Investment Bank, SRP spoke to Michael Nelskyla, head of investor solutions Americas, UBS Investment Bank, about the new sustainability range, the reasons behind the move and how to make ESG investing mainstream.

"We have been working on this development for some time as part of our global sustainable and impact investing efforts," says Nelskyla. "There is a clear shift from many banks and financial institutions in this area but the approaches seem to be very fragmented within the different parts of those firms. Our aim is to have one strategy across all divisions which is why the announcement was made at a joint event with the asset management, wealth management and investment banking businesses."

According to Nelskyla, UBS' global view is that ESG is no longer a niche investment segment but one that is going mainstream and "we want to be at the forefront of developments and a leading provider of ESG solutions".

"One of the issues that prevented SRI from taking off was the lack of clarity around the assets sold as socially responsible," says Nelskyla, adding that other factors that prevented this segment from going mainstream was that the standards around SRI were very limited and the lack of reliable data, and screens which would give you the ability to filter SRI assets.

"The industry has bounced back from that situation and is now in the position of offering real ESG portfolios and investment products without having to sacrifice performance."

There is a lot of talk about the benefits of ESG but the only way to provide value is by delivering returns and the industry has gone a long way to be able to achieve this, according to Nelskyla. "Clients no longer see ESG as a feel-good type of investment but as something that is an essential part of their portfolio and that can deliver as good returns as any other investment," he says. "We know from recent research papers and statistical data that new age groups such as the Millennials have a very strong focus on impact and sustainable investing, and are demanding new investment products to use in their portfolios."

The industry has reacted to this shift and at firm level "we are responding to client demand and maximising the capabilities of the different UBS business divisions to leverage our expertise with different product types", according to Nelskyla.

"We want to develop a comprehensive range that meets the needs of clients with different risk profiles and goals," says Nelskyla. "We are convinced that assets invested in ESG-linked products will grow on as we deliver performance. We are doing a lot of work in the equity derivatives desk to make sure we provide the same kind of value and performance with these products as we would with any other equity-linked product."

Despite the momentum around ESG strategies, assets invested remain marginal compared with equities, the main driver of activity in the structured products market. "ESG products aren't an alternative to equity investments but a complement, and therefore you have to offer equal or better returns and payoff profiles as part of a sustainable portfolio," says Nelskyla. "You cannot approach this segment with one size fits all mentality as you have to find the right vehicles and the right underlying assets to deliver a meaningful solution. One segment of the structured products market is purely driven by trading activity and is based on short term and opportunistic payouts. We don't see ESG assets on this side of the market because the driver isn't long-term ESG profile returns as the focus is on short term and opportunistic trading returns. I don't think we will see many ESG strategies /products in this segment."

According to Nelskyla, the added value with ESG is on the indexing side of things "where you can design and provide either customised underlyings or risk premia portfolios".

"ESG strategies will also lend themselves to long-term asset allocation via buy and hold structured products offering exposure to single or multi-asset structures," says Nelskyla. "ESG not only has opened up new opportunities to come up with innovative ideas for underlyings but the quality of those underlyings is also superior that in the past. The ability to access granular ESG data and metrics has increased and we can be much more efficient in coming up with new ideas, and provide a higher level of customisation to meet certain goals. This has also brought transparency to the segment and investors appreciate that."

The ESG space is in the early stages of development and the whole segment will benefit from the new avenues for innovation, according to Nelskyla. "As in any other area, there are limits for innovation," he says, adding that the market is now moving to ESG 2.0 on the back of new demand. "We are catering for that demand. The question is to see where ESG 3.0 takes us which could very well be in the context of why would you not have ESG in your portfolio when you can get similar returns versus a non-ESG portfolio?"

Nelskyla points at the car industry to suggest where ESG will take the structured products market. "Electrification will eventually bring to the fore questions on the effectiveness of any other alternatives," says Nelskyla.

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