Markets not regulations will drive sustainable investing

The power of global financial markets will ultimately dictate the transition to sustainable investing, and innovative solutions are emerging for large investors who demand scale

Michael Baldinger
Michael Baldinger

The urgent need to act on the threat posed by climate change and the degradation of the planet will see increasing legislation and regulation-led changes forcing firms and jurisdictions to act on achieving environmental sustainability. However, more powerful market forces are at play that will ultimately decide the winners and losers in the global drive to achieve sustainability.

“It's not about federal governments, for instance the Trump administration withdrawing from the Paris accord; this will not define which companies will survive or not. The investors will and it should be that way,” says New York-based Michael Baldinger, head of sustainable and impact investing at UBS Asset Management.

Baldinger also stresses that no matter how much regulation is pumped into forcing companies to take action on achieving sustainability targets, the market itself will regulate who survives and who fails.

“The capital markets are the most powerful transmission mechanism to promote corporate sustainability, I strongly believe in that,” says Baldinger.

The finance sector is certainly on the cusp of real change as the momentum to act over global warming gathers pace. Baldinger cites the impending European Commission’s ten points on Sustainable Action Finance as a real inflection point.

Some commentators note that this action plan may be fine for developed European economies, but when considering those economies that are positioned at a different stage of their economic development, such as emerging economies, the idea of sustainable investing can be more problematic.

Baldinger is well aware of this dilemma, highlighting the dichotomy some emerging markets in Asia face where growth still relies on dirty energy sources and industries that pollute. In such places, he believes that the use of regulation alone to advance environmental and sustainability standards could damage the economy and lead to potential job losses.

On the other hand, particularly in North Asia, he sees a lot of progress happening. He notes that China is now the largest renewables investor in the world. 

He points to South Korea where companies listed on Seoul's stock exchange have to report on greenhouse gas emissions directly attributable to the company, and reiterates the best thing about these cases is that it's being driven from the bottom up.

Further to this point, the real driving force underpinning the Swiss lender’s adoption and implementation of sustainable and impact investment strategies has emanated from the bottom up.

He notes that clients in Asia respond in great numbers when surveyed on ideas, proposals and demand for sustainable and impact investing products and solutions. 

“It was a big survey, and the numbers were very high, much higher than we thought," says Baldinger.

Pioneering and innovative mindset required 

“Our client requirements are changing and they're changing fast, we have second and third generations, not just in asset management, but also in wealth management, who demand sustainable investment solutions, without sacrificing performance,” he adds.

As Baldinger builds out his team he has been encouraged by how many people want to be part of the change. 

He explains that the demand to join the sustainable and impact investment team has been overwhelming, with literally thousands of applicants applying for roles in the unit.

According to Baldinger, the industry segment is seen as a pioneering space, so much so that the commitment to finding sustainable investment solutions is attracting innovative thinkers who are joining the bank from non-traditional banking backgrounds.

The sovereign wealth funds that Baldinger works with are now upping their sustainability credentials by recalibrating their investments away from companies they perceive as damaging the environment. 

Leading by example

Norway’s US$1 trillion sovereign wealth fund recently extracted investment from palm oil firms they claim were responsible for deforestation. Japan’s massive Government Pension Investment Fund signed the UN-backed Principles for Responsible Investment in 2015, and has been rapidly growing its investment in sustainable assets.

The inclusion of environmental, social and governance material in the investment analysis process is assisting investors who want to make better-informed investment decisions. 

It is also becoming clear that firms with good performance on material sustainability issues are outperforming firms with poor performance on these issues.

But with sustainable investing still in an embryonic phase, some still doubt whether there is sufficient product capacity for major sustainability-minded influencers to invest their billions of liquid dollars.  

“What we see now is that those large investors who come our way need scale. Scale doesn't come from private investments, they need really highly-liquid listed companies,” Baldinger says.

“So, for example, for one large client we created an impact solution, but we didn't have all the answers. So, we established a cooperation framework with Harvard University and City University of New York and University of Wageningen, the client and us. That's how we create an impactful framework,” he adds.


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11 Apr 2019


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