Bringing Private Capital to Sustainable Development
By Mark Haefele and Simon Smiles
Last year, voters in two of the world’s largest economies — the United States and the United Kingdom — tried to ensure their governments put more effort into domestic rather than international issues. At the 2017 World Economic Forum Annual Meeting, one key topic was the increasing importance of private rather than public capital in solving problems that don’t respect national boundaries. These include pollution, population growth, and diseases associated with aging. We think the best way to fund related targets like the United Nations’ Sustainable Development Goals (SDGs) is via improved allocation of private capital — helping to save the world and save for their financial goals at the same time.
To really make a difference, capital needs to be invested on a massive scale. The SDGs are 17 challenging global targets for the year 2030 in areas like education, health care and the environment. To meet them will require as much as USD5-7 trillion of annual investment, according to the Brookings Institute. This aim sounds almost insurmountable unless you consider that in 2015 households globally were worth USD250 trillion, according to Deutsche Bank estimates.
Private investment alone cannot meet the SDGs — regulatory change, philanthropy, and public investment will also be required. But it will be a crucial source of capital.
And yet, our research shows that most initiatives around SDG funding gaps have not included a specific focus on private wealth. Obstacles to attracting private wealth include: data around SDG funding gaps, which must be improved, centralized, and made more transparent; terms and disclosures on SDG-related investments, which have yet to be standardized; a dearth of SDG-related investment networks, which should be developed to connect investors with opportunities; and projected financial returns, which need to be upgraded if they are to sustain private investors’ interest.
This last point is especially critical. Many private investors already contribute to the SDGs via their philanthropic activities. They are typically less willing to invest in them via their for-profit portfolios unless they earn them comparable gains. Impact investing, which aims to generate measurable social benefits as well as compelling returns, can fill this gap. But to date the impact investing industry has offered mainly smaller opportunities that do not always come with a competitive profit attached. The SDGs can help mainstream the industry by presenting large-scale global opportunities in fields like emerging market healthcare that can also be smart for-profit investments.
This year’s WEF Annual Meeting was critical to this private SDG funding effort, not only because of the political climate but also because related fields like impact investing and investment networks are moving towards critical mass. One example is Align 17, an SDG-related investing and philanthropy platform proposed by World Economic Forum Young Global Leaders and named after the 17th SDG of partnership in meeting the Goals. Stakeholders as diverse as the Gates Foundation, the SDG Philanthropy Platform, accounting firm PwC, private equity manager TPG Growth and UBS have expressed interest in working with Align17. Such networks should boost coordination when it comes to solving SDG-related problems.
Caveats remain, of course. Our research shows that private investment is likely to be most effective when it comes to the SDGs relating to: zero hunger, good health and well-being; quality education; industry, innovation and infrastructure; affordable and clean energy; and climate action. For the other SDGs, private investment will probably play a lesser role. In some cases, SDGs requiring public investment and regulatory change may also face new headwinds in the current environment. Nevertheless, we hope that private investors can provide compensatory tailwinds and earn a healthy return at the same time.
Mark Haefele is the Global Chief Investment Officer UBS Wealth Management and is the chair of the UBS Global Investment Committee. He oversees investment policy and strategy for approximately USD2 trillion in invested assets. He joined UBS as Head of Investment, CIO WM, when the CIO office was founded in 2011. Before that he was the co-founder and co-fund manager at Sonic Capital. He also served as a Managing Director at Matrix Capital Management. A former lecturer and acting dean at Harvard University, Haefele serves on the Foundation Board of the Pension Fund of UBS. After receiving his bachelor of arts from Princeton University, he earned both master’s degree and doctorate from Harvard University. As a Fulbright Scholar, he also received a master’s degree from the Australian National University.
Simon Smiles is Chief Investment Officer – UHNW. In this capacity, he and his team formulate investment strategy, themes and trades for UBS’s Ultra High Net Worth clients. He is also responsible for derivatives, hedge fund, private markets, sustainable, and short-term trading investment strategies, leads UBS WM’s impact investing efforts, contributes to the wider UBS WM House View, hosts the monthly UBS Investor Forum, and sits on UBS’s Global Investment Committee. Prior to moving to Zurich, Smiles worked for UBS Investment Bank in Hong Kong as Head of Asian Thematic Research. Before this, he ran UBS’s media and internet equity research team in Australia, and taught economics and finance at the University of Sydney and UTS. Smiles is a WEF Young Global Leader, IIF Future Leader and UBS Opinion Leader. He received a doctorate in economics from the Australian National University and first class honors in both economics and finance from University of Sydney.