UBS Chairman: The niche market for 'impact investing' could be huge - but it needs derivatives

• UBS Chairman Axel Weber sees a growing market for so-called impact investing, which focuses on projects that are good for the environment or society as a whole.
• Derivatives such as bond indices are needed to take the market mainstream, Weber said, to allow investors to hedge risk.
• You can see the first and second parts of Business Insider's interview with Weber here.

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LONDON - The market for so-called impact investing, which funds projects beneficial to the environment and wider society, has a problem.

There's no global agreement on how to measure the impact, according to UBS Chairman Axel Weber.

Only when the proper standards are in place, and markets for derivatives such as bond indices are developed, can it truly take off.

"At UBS we see a big demand from our clients for sustainable investment," Weber told Business Insider in an interview earlier this year. "Many of our wealthy clients are active in philanthropy or run charities, and through these charitable engagements they're used to looking at impact."

The market for green bonds, which are securities aimed at funding environmentally-friendly projects, is growing.

In 2016, the world's largest asset manager BlackRock said that curbing carbon emissions "requires significant spending on green infrastructure and a reduction in fossil fuel subsidies," creating "large investment opportunities."

But at the moment, the industry lacks the solid global standards to take those opportunities to a larger pool of investors.

"Very often, we move in niche products," said Weber. "What's important for us is to make it a mainstream product. When you want to bring something from a niche to the mainstream there are a number of conditions you need to fulfill. "

With derivatives comes the ability to hedge the risks inherent in making an investment, Weber said.

"Once you bring a broader set of investors to the market, you need to develop scale and the wider market ecosystem. You need to standardise these products and develop indices. Once you have an index, you can create products based on that index, which then helps to increase liquidity beyond the primary investment," Weber said.

"You can develop a futures market, hedge some of the risks, and develop deeper and more liquid markets around impact investing by creating the financial market infrastructure around it."

A derivative is a type of financial contract which has a value derived from an underlying asset, which could be anything such as a bond, a bar of gold or a barrel of oil.

Rules around derivatives trading have been tightened since the 2008 financial crisis. Regulators have sought to standardise the contracts and increase the flow of trading done via central counterparties, which is seen as being less risky to the stability of the overall financial system than bilateral trading.

"Philanthropists are increasingly focused on impact philanthropy, and investors on impact investing. These two worlds can meet," Weber said.