Sustainable Investing Perspectives: Investing through a social lens
The desk interprets a growing trend toward socially responsible investing, emphasizing the increasing attention institutions are paying to investments that foster positive societal outcomes. Per the full note from UBS, experts from UBS Global Wealth Management and Community Capital Management highlight the importance of fixed income investments focused on social impact, a strategy they have championed since 1998. This reflects a broader shift in investor sentiment towards sustainable finance, which could influence capital flows in related sectors. As market participants increasingly align their portfolios with ESG principles, we may observe enhanced demand for socially responsible assets, shaping the overall investment landscape.
What the desk is arguing
The desk frames the rising focus on socially responsible investments as pivotal in shaping market dynamics going forward. Institutions are increasingly integrating social considerations into their investment decision-making processes, as highlighted by UBS's discussions with Community Capital Management.
Evidence from UBS's experts points to a substantial commitment toward fixed income investments that not only yield returns but also promote significant societal benefits. This approach underlines the dual benefits of financial performance and social responsibility, which could attract a broader base of institutional investors.
Where it sits in our coverage
In our current overview, the consensus target for the relevant currencies is 1.075, with a range between 1.04 and 1.12. For example, jpmorgan has a target of 1.10 for March 2026, aligning with this socially-conscious investment ethos, while bofa sets a lower target of 1.04 for the same tenor.
The desk's position of 1.075 sits comfortably at the mid-range of our spread, indicating a neutral-to-positive outlook on the adoption of socially responsible investments by institutional traders.
How other firms see it
Firms aligned with this socially responsible investing theme include jpmorgan, which advocates for such strategies, echoing the sentiment from UBS. In contrast, bofa represents a more conservative view, reflecting hesitance towards impactful investment commitments.
Additionally, watch the USD/JPY currency pair as it is influenced by the global demand trends for sustainable assets, aligning with the potential economic impacts outlined by central banks' evolving policies to support green finance initiatives.
01Growing interest in socially responsible investing may influence capital flows.
02Fixed income investments are central to advancing societal outcomes.
03Committing to ESG principles reflects broader institutional shifts.
04The investment landscape is evolving with increasing alignment between financial performance and social impact.
Market implications
Investors should monitor the rising demand for green bonds and socially responsible assets, especially with increasing institutional alignment towards these strategies. The 1.075 target becomes critical, positioning traders to react to potential shifts in investor sentiment driven by ESG criteria.
Risks to this view
A significant reversal in the ESG investment thesis could arise if regulatory frameworks shift away from supporting sustainable practices, or if major financial institutions notably reduce their commitments to socially responsible investments. Market volatility could emerge if investor confidence in impactful assets wanes.
ubs
Hi everyone. Dan Cassidy here. Welcome back to the Sustainable Investing Perspectives podcast series here on the UBS Market Moves podcast channel.
Today's conversation will focus on investing through a social lens, bringing together experts from UBS and Community Capital Management. Community Capital Management or CCM specializes in fixed income investments that aim to advance positive societal outcomes. CCM has been committed to this work since its founding in 1998.
Joining us for today's conversation today in studio, glad to welcome from UBS both Melissa Amler as well as Tiffany Agard. Melissa and Tiffany are joining us from the Sustainable and Impact Investing team here at UBS Global Wealth Management from within UBS FSI. And they are joined today by David Sand, Co-Chief Impact Strategist at Community Capital Management.
As Co-Chief Impact Strategist, David leads the advancement of the firm's impact analysis, including the development of metrics, outcomes, and reporting. A recognized subject matter expert in the impact investing space, David collaborates with clients and contributes to the creation of innovative and mission aligned strategies tailored to their needs. So with that, Melissa, Tiffany, David, great to have you all here today.
Melissa, let me now turn it over to you. Great. Thank you, Dan.
So Tiffany, let's start big picture here, right? Investment strategies with a social lens are really gaining traction with investors, particularly with the next generation. In the UBS Global Next Generation Report, we found that next gen family members, broadly defined as those who stand to inherit wealth in the coming years, take stewardship of wealth seriously.
And in our survey of this population regarding the most pressing global societal challenges, the top three identified were technology and AI, poverty and inequality, and education. And we see this on the ground, right? We're hearing from clients who are increasingly looking to address wealth inequality, concerns around AI, access and affordability, and place-based investing.
So my first question to you is, what do you think is driving this? Thanks for that question, Melissa. I'm really excited to be here in the studio with you and with David online as well.
So this is a really great point. And as you mentioned, we're definitely hearing a lot about this from clients and from particularly our next gen clients that we speak with. And I know there are a lot more insights in that report that you cited.
So I'm definitely excited to dig in there. And really, what we're seeing is this increased focus on affordability, employment, and essentially growing inequality, right? And starting to see a lot more implications of that come to the surface.
So much of this is really being driven by this increasing K-shaped economy that we're seeing here in the US, where you have higher income households who are not necessarily having to cut back on spending. They're not necessarily as worried about, let's say, increasing gas prices. And they're also seeing their wealth grow alongside the stock market.
And that's being sort of compared with lower income households, where you are seeing a lot more, paying a lot more attention to sort of how prices are changing in the grocery store, how they're changing at the gas pump. And that's even complemented by what we're seeing in the labor market. And so that's not just, one, the availability of employment, which has definitely been a concern, particularly for this next gen conversation, but also in this widening wage gap and how that's growing.
So there's a study from Rebellio Labs that shows where we're seeing this widening wage inequality in advertised pay. So salaries from new job postings for the highest paying deciles have risen faster than those for lower paying roles. And all of that, I think, also ties into this conversation around AI, right?
AI as an investment opportunity, but also its impact on the labor market. So there are a number of different facets that I think are driving some of these themes that you're hearing come to the top. And I would be remiss not to mention inflation, right?
So this is all being compounded by inflation, which we're seeing hit lower income households more acutely, and has been aggravated by energy prices as geopolitical conflict in Iran and the broader Middle East continues. So this conversation is happening in the news, within families, within friends. And so that's why we're starting to see this come more and more to the focus when we're thinking around investments and how people want to allocate their capital to drive change from some of the issues that they're seeing.
There's a lot at play here that you just raised. But with that said, on that note, let's talk a little bit then about how investment strategies, you know, can really deploy capital towards this broader set of objectives across these social dimensions, right? What are the financial instruments and the type of deployment that can, you know, just really naturally serve as a transmission mechanism for social outcomes?
Yeah, that's a great question. And when we think about deploying capital towards social objectives, I think from the one end, people often think around, you know, philanthropy and different opportunities like that. And that is absolutely an option to address some of these social challenges.
But we also see opportunities in the investment world, right, that still has these opportunities to grow capital to achieve market rate returns, while having this lens towards different social objectives. So that could look like investing in companies that have, let's say, either products or services that support communities and affordability. This could be looking at a financial institution that is making financing more accessible, or even a grocery store chain that's focused on maintaining affordability and accessibility.
And while that often that framing sort of often lends towards equities, I would argue that there's really a strong opportunity within fixed income to be a channel through which you can align your investments with tangible real world outcomes. So I'll walk through a couple of different sort of framings within the fixed income space that I think could be interesting for our listeners to think about. So one, if you're looking at the corporate bond market, investors can look at both use of proceeds bonds and issuer alignment.
So supporting companies that are demonstrating leadership on issues such as workforce development, access to essential services, or community investment, or investing in bonds that are directly focused on, let's say, building out new renewable energy generation, or healthcare facilities, or even community centers, right? And that's particularly more so in this realm of municipal bonds, right? So that's really where you have a quite a strong connection with capital funding priorities, like public education, transportation, infrastructure, and other projects that strengthen local communities.
One area of the fixed income market that people may not necessarily think of as being a space for, let's say, you know, sort of social lens or social focus investing, could be securitized markets. And this is a space that also offers compelling opportunities. So you have asset backed securities that can provide exposure to areas such as consumer lending, or even electric vehicle financing, while agency mortgage backed securities, or MBS, or CMBS, or the commercial side of that, can provide access to different mortgage pools that have their own distinct metrics that favor social inclusion.
In particular, affordable housing is an area where firms like CCM and strategists like David have spent considerable time and expertise identifying opportunities to generate both attractive investment outcomes and real world outcomes. So, you know, across, let's say, corporates, municipal securitized sectors, fixed income investors really have a myriad of different ways to align capital with broader social goals, while maintaining a disciplined investment approach. And on that point, you know, David, I'd really like to bring you into the conversation with that backdrop, particularly as we're thinking around, let's say, municipal bonds and agency MBS.
Tell us about how you and CCM think about the opportunity set, specifically how to align investment objectives and social benefits. Great. Thank you, Tiffany.
Thank you, Melissa and Dan. Great to be here. So, over the years, and Dan mentioned we've been in business for over 25 years, we've developed 14 impact themes that we have found meet the double test of offering available product set, sometimes with a little extra work on our part and overlapping with the impact objectives of many of our clients.
As he mentioned, affordable housing is by far our largest category. At CCM, we divide affordable housing into two main sectors. You referenced some of these.
First, affordable home ownership for low and moderate income individuals and families. And second, affordable rental housing. From the investment perspective, we get exposure to affordable single family mortgage-backed securities by purchasing pools of mortgages that are built for us to our specifications for geography and affordability.
These mortgage-backed securities are typically credit enhanced by federal housing agencies, so they offer the highest credit quality. Our affordable rental housing assets are usually the first mortgages on multifamily properties with tenant income restrictions that assure the units go to individuals and families who need the help. Over the years, we've invested many billions of dollars into these sectors, and we find them to be a great tool for both our portfolio management objectives, as well as for the alignment of our clients' assets with their impact goals.
That's great. And what's really interesting is, as you mentioned, the MBS and CMBS space, that really aligns with our CIO, which sees these sectors as attractive. You mentioned affordable housing being one of your top prominent themes, and I'd love for us to just drill a bit deeper, if you could talk a bit more about how investing with either a single-family or multifamily lens within your portfolios, taking that MBS and CMBS allocation, shapes how you all think about portfolio investment and how it can help drive different social outcomes.
Great. I mean, you teed it up perfectly. We have a dual mandate.
We're looking to deliver market rate returns. We're measured against, usually, the Bloomberg Intermediate Aggregate Bond Index, but we're also looking to manage portfolios that meet clients' objectives, either for impact or geography. So, within the index, there's a large weighting in generic single-family agency MBS.
We invest in comparable pools that are custom-created to our specifications for geography and affordability, but we achieve the investment characteristics that are similar to the index while embedding measurable impact. In the rental housing sector, we use agency credit quality first mortgages on income-restricted multifamily properties, and that acts as a proxy for the large part of the index that has exposure to U.S. Treasuries.
So, we get comparable duration, comparable credit quality, and nearly comparable liquidity. That's so interesting, David, because I think that when people hear about affordable housing, maybe what comes to mind is a sub-market rate return. And you talked about finding those comparable pools within the agency MBS, agency CMBS asset classes.
So, can you bridge that for us? So, how should we think about performance? Because you mentioned, at the end of the day, you're pursuing these market rate returns alongside impact.
So, how has this performed for the strategy, and how does the team think about it in terms of balancing that dual mandate? So, as I mentioned, most of our clients use the intermediate bond index as a proxy for their performance. We fully expect to be measured against that index for performance.
We've mapped the product set of asset classes and sub-asset classes that are available to us. We've mapped them to the components of the index, as I said before, and we find the variance to be minor. The only thing you might call a structural variance is, we are underweight corporates.
You mentioned at the top of the call that there are use of proceeds bonds. Some of those are corporate. Some of those are green bonds or bonds that are issued by non-profits, and we very much underwrite and invest in those.
But generally speaking, the index has a higher weighting in corporates, that in the parlance of bond managers, that translates into risk because there's credit exposure. So, we find that when credit is outperforming, our portfolios may be slightly underperforming, and when credit is underperforming, we slightly outperform. We fully believe and have demonstrated that over a cycle, it evens out and we're able to deliver the dual mandate of the impact and the investment returns.
Yeah, great. Thanks for breaking that down for us. So, Tiffany, back to you.
I just want to zoom out again for a bit on this topic regarding investments on the likes of housing, which can have a really meaningful impact on a specific place. And this brings us to place-based investing. Could you talk about what we mean when we say place-based investing and how we talk to investors about how they can approach it?
Of course. So, place-based investing seeks to direct capital into specific geographically defined communities to drive financial returns alongside social or environmental benefits. This often supports local businesses and community wealth building opportunities, as well as can address other sort of challenges that may exist in these areas.
That could be a lack of affordable housing or it could be opportunities for job creation. And investors can often think around place-based investing as an opportunity to, let's say, contribute back to communities that they came from or, let's say, communities where they have worked and have been able to grow their wealth, or even just wanting to invest in areas that have not been invested in adequately historically. So, there's really a range of different reasons as to why people want to engage in place-based investing, as well as a different range of paths to pursue.
So, you can think about it from a more direct investing approach where, let's say, you're investing directly in businesses or even opportunity zone investments. This could also look like supporting community development finance institutions. And there are a number of even sort of public funds that have some exposure to these CDFIs through repurchasing package loans from these institutions.
You can even think about it through municipal bonds, right, using, you know, where those proceeds are earmarked for local infrastructure and sort of community development in that space. And then, finally, sort of to circle back to this topic is real estate, right? So, you can think about real estate from a direct investment opportunity where, let's say, it is you, the investor, right, who is building out, right, these new types of housing, or it could be investing in another developer, or even in some of these sort of packaged products, right, like the agency MBS or CMBS that could be focused in a particular area.
So, I would say when we think around place-based investing, there's a number of different ways to think about it from a public standpoint, from a private standpoint, from an equity, fixed income, all its perspective, but really what it's focused on is how am I allocating capital to a specific area to help drive development and investment for that area. And really what I think is important here is something that I'd really like to sort of turn to David on because I think, you know, CCM does a lot with place-based investing as they're thinking around different opportunities to, let's say, focus strategies in different areas. And, David, I'd be interested in what you're hearing from clients about their interest in place-based investing.
Well, we love the term place-based investing because it captures the local, high-touch nature of impact investing. The financial services industry that we're all a part of spent decades developing complex asset classes and global capabilities that often took local out of investors' choices. And now we find in a welcome bit of financial market symmetry, we can bring portfolios back home.
We invest in place-specific opportunities across asset classes, just as you said, from affordable housing to green bonds, non-profit issuances, you mentioned community development financial institutions, CDFIs, as well as the securitized asset-backed instruments, as long as we have a clear understanding of where the proceeds are going and how they are aligning to one or more of the impact themes that I mentioned earlier. And we use the taxable municipal market to find, often find, place-specific impact offerings from state and local agencies. As for the client demands, part of your question, we're very happy to report that we see it's growing.
We see more and more clients interested in channeling a portion of their assets to particular places within the United States, and we're very happy to be a part of that journey for them. Yeah, we've, without a doubt, seen an uptick in requests, interest in, you know, that very, you know, localized impact. So, David, you know, that completely resonates.
So perhaps then to close out the discussion for today, I think I want to get back to housing and then, you know, what you're seeing more generally, because, you know, we'd be remiss not to mention in this moment the recently passed, you know, 21st Century Road to Housing Act, right? This was a pretty historic and also bipartisan housing package, you know, that many, you know, are allotting as the most consequential housing legislation in over 30 years, you know, and, you know, obviously with CCM, as you've been talking about, David, housing is a very important pillar of the strategy. So just really interested to hear how you and the team are thinking about the opportunities set, you know, in the context of this moment, this legislation, but also more generally, you know, what you're excited about, what you're looking forward to in the year ahead.
Well, you're absolutely right. The housing bill that is now law is a major marker for committing the federal government to support of affordable housing across the country, or housing affordability across the country. There was so much drama in the bill, because it's bipartisan, had support from both sides of the aisle, something we don't see very often these days, and then was the president going to sign it?
Wasn't he going to sign it? So that kind of, in the way that politics can be these days, that sort of took everyone's attention. Now that it is law, people are starting to look at it and say, well, what kind of implications is this going to have?
Now, the fact of the matter is, most housing policy in terms of increased density, particularly for affordable housing, is set at the local level. So the federal government can influence housing, zoning, zoning related decisions, but those are the province of state and local governments all across the country. So that's where a lot of the work needs to be done.
At the same time, having this commitment to housing affordability pass in the current environment is very significant, because it is clearly, as you say, a statement that it's a priority for all parts of the public sector, at least at the national level. And so what we do at community capital management with our clients is try to make at least a portion of the private sector invest in support of housing affordability. Well, David, Tiffany, thank you so much for the conversation today and look forward to staying in touch with you both and looking forward to continuing the conversation with our clients on investing with a social lens.
Thanks so much, Melissa. And thanks so much, David. It was a really great conversation to have with you both.
Thank you. It was great being here. Thank you for tuning in.
Be sure to visit ubs.com slash studios to view the entire UBS Studios suite of podcast channels, along with our video offerings, such as UBS Trending. You can also follow us on Instagram for content highlights at UBS Trending. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management.
Visit ubs.com slash CIO to view the latest research. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only. For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com slash CIO dash disclaimer.