When private-wealth clients say they want to invest with impact, it is often up to the relationship manager to figure out what that actually means.
Mostly, the challenge isn’t just guaranteeing a positive outcome from the capital allocation, but also deciding which measurements and reporting practices will be sufficient to quantify that impact.
These are questions that managers have been grappling with for years, and the discussion around impact reporting has triggered the growth of a new subclass of intermediaries in the market that provide data and reporting solutions to please the wealthy.
Chief among these solutions is carbon tracking.
“Carbon reporting has become quite critical for private investors, who are asking for more sophisticated information to understand things like the carbon intensity or carbon footprint of their portfolios,” says Antonia Sariyska, sustainable investing strategist at UBS Global Wealth Management’s chief investment office.
Sariyska joined UBS Global Wealth Management in 2017, first as a sales manager, the quickly building on her expertise in social entrepreneurship to focus on impact investing in the CIO.
The wealth and asset management business has been following the trends in carbon tracking closely, given the unavoidable scrutiny that investment firms are facing on environmental, social and governance reporting.
Like other lenders, the bank is also venturing into carbon reporting with retail clients in Switzerland. Its digital solution, key4, allows clients to track their personal carbon footprint through payments made with UBS credit or debit cards, as well as the payment app UBS Twint.
Know the difference
For Sariyska, the question of measurement is fundamental, but there is a tendency to look for a one-size-fits-all metric when, in fact, there are different ways of looking at carbon, based on the impact objectives of an investment portfolio.
“It’s very important for an investor to understand what a low-carbon portfolio means in terms of real-world impact,” she notes.
Wealth managers should be working to build investor awareness of what different data points mean and how they were calculated, she says. Otherwise, it is measurement for the sake of measurement.
Investors need to be able to differentiate between how a company is operating today and where the business model is going, otherwise they may miss out on decarbonization opportunities
For example, 'carbon footprint' is a snapshot that gives investors information about what a company is emitting at that moment. Whereas 'implied temperature rise' is a form of carbon tracking that tries to show momentum and how a company is positioned for the future.
And if the point is to look at decarbonization progress over a period of time, then clients may be interested in knowing the 'total carbon emissions', a metric that tracks the absolute greenhouse gas emissions associated with a portfolio and that can be used to show trends.
“All these measurements have pros and cons. But it comes down to what the investor wants, so understanding those preferences is essential,” says Sariyska, drawing a parallel with the difference between looking at the revenues of a company and looking at its capital expenditure.
“Investors need to be able to differentiate between how a company is currently operating today and where the business model is going in the future, otherwise they may miss out on decarbonization opportunities,” she adds.
Swiss leadership
In contrast to retail and commercial banking, where carbon tracking could be standardized across millions of small and medium-sized enterprises and individual clients, the practice requires more flexibility in private wealth, reflecting how wealth managers deal with clients: in a tailored and discretionary way.
“Wealth managers are interested in raw data and insights that can feed into their decisions rather than a single data point that sums up the sustainability angle,” says Sariyska.
In private wealth however, most capital flows go into funds, which means that wealth managers also need to be able to study the landscape of information collected and reported by fund managers and make those data sets more digestible for clients.
Reporting requirements mean that there is more data coming from companies, but regional discrepancies in data quality, along with the use of proxies, also mean that there is demand for standardization initiatives, particularly in the investment fund landscape.
For Sariyska, one good example of this is Swiss climate scores.
In 2022, Switzerland’s State Secretariat for International Finance launched the Swiss Climate Scores, a set of transparency criteria for environmentally sustainable investments.
In November 2023, UBS was the first large global financial institution to publish SCS reports for around 60 equity and bond funds domiciled in Switzerland.
“It’s an initiative that takes all different bits and pieces of climate reporting, including carbon emissions and implied temperature rise, to then deliver a summary to individual investors,” says Sariyska.
Whether it is simple enough is another story.
“We think there is a need for more standardization and at the same time see progress in how the financial industry communicates carbon and climate data to private clients,” she adds.
When asked about where carbon tracking will go next, Sariyska points to the topic of transition. The more the market familiarises itself with the idea of financing companies as they switch their business models towards more sustainable and low-carbon operations, the more investors will turn towards new tracking metrics. These include transition pathways and science-based targets for carbon-intensity reduction.
“That is the next step in carbon tracking for investors,” she says. "Asset allocators such as ourselves are looking into this development with great interest."
