Retail investors have more unique views on particular topics, UBS

In the second part of an interview within a series of articles covering recent ESG developments in structured products , Michael Nelskyla (pictured), head of investor solutions Americas at UBS, talks about the competitive landscape around sustainability and ESG, where the demand is and why ESG is poised to become mainstream.

ESG has called the attention of almost every structured products manufacturer, which means that differentiation can be difficult. According to Nelskyla, UBS' edge is based on its unified approach. "[This] is unique," said Nelskyla. "Having a feedback loop with our clients and an extensive wealth management network gives us the possibility to respond quickly to demand as well as to be innovative and adapt these ESG strategies to any product type (structured products, indices, ETFs or funds), so that we facilitate access via different vehicles."

The philanthropy element in this initiative which will allocate a pre-defined portion of proceeds as philanthropic contributions to its dedicated charitable UBS Optimus Foundation, "also set us apart from other competitors in the market", according to Nelskyla. "We are leveraging our manufacturing capabilities to design and build the indices, and then we will structure the products," said Nelskyla. "The first range of indices in the global sustainability space will target the 17 proposed UN sustainable development goals, starting with social equality, veterans social impact and clean energy."

The bank has a "product agnostic approach", but the focus is not on issuing products "to be traded actively, because we think this kind of strategy does not lend itself for speculative trading and returns should be measure more on the longer term", according to Nelskyla.

Traditionally, demand for ESG exposure has come from institutional investors, but there is an increasing number of retail investors seeking to use these products as well as knowledge and education increases, according to Nelskyla. "Investors are more informed and better equipped to be more selective with the assets they want to invest in, and there is a clear trend from the retail segment around ESG," said Nelskyla. "People want to know where they money goes and want to align their investments with their own social and environmental views.

"Institutional investors want exposure to higher amounts of assets and stocks that are screened differently from what a retail product would do," he said. "Some investors may have a very strong focus on non-ethical assets, but include oil stocks in their portfolios on the basis that those firms may be seeking new ways to deliver renewable energy and moving away from the old carbon-based setup."

On the other hand, retail investors have more unique views on particular topics and their focus might be on products that provide exposure to assets that are in line with their views on a particular theme and what is valued for them as individuals, rather than a portfolio driven approach, according to Nelskyla. "That's where the nuances come through, and where you can be granular to respond to sentiment-driven demand from retail as well as to model portfolio-driven demand from institutional investors," said Nelskyla.

Today a company that has dropped out of the S&P 500 index, for whatever reason, would be concerned because they know their stock may no longer be part of an institutional portfolio allocation mandate, according to Nelskyla. "This is like having a quality certificate attached to your name or brand," he said. "We want to be in a situation where firms take action to meet the requirements to be included on ESG strategies."

Eventually there will be ESG filters at an exchange level as well as other ways to standardise ESG and how it is measured, according to Nelskyla. "[However,] ultimately, it will be the mainstream acceptance that will make ESG a norm as opposed to a filter that you add to investors' portfolios," he said.

"You need to support these strategies with very comprehensive data," said Nelskyla. "In some cases, we can deploy those resources internally, but there is scope for partnerships with specialist third parties. We expect some of the activity to be driven by partnerships, and we are working with a number of third parties in this area, ranging from non-profit organisation, to index providers and research companies."

UBS's move to develop a new sustainable range comes almost two years after the Swiss bank licensed the Dow Jones Sustainability Europe Diversified High Beta High Dividend Index - an index tracking high income liquid stocks with high historical beta within the teh index provider's Sustainability Europe Diversified Index, to develop a range of investment products.

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