How to build an ethical or sustainable client portfolio

This article is part of
Guide to investing for good

“Or whether they wish to start from a more negative screening position, where they define the key areas they do not wish to invest in and build a portfolio from this base which can then include a positive overlay if required.”

Triodos Bank recently published its Annual Impact Investing survey, conducted among 2,020 UK adults, which shows investors are generally fairly clear in their minds about which industries they would rule out investing in:

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  • Manufacturing or selling of arms and weapons - 38 per cent
  • Worker/supply chain exploitation - 37 per cent
  • Environmental negligence - 36 per cent
  • Tobacco - 30 per cent
  • Gambling - 29 per cent

Ms Dreblow suggests advisers can help clients to navigate this area of investing by offering supplementary fact finds to explore their areas of interest.

“There are many ways this can be done, but essentially the options are around either selecting the ‘styles’ of fund that are most likely to be suitable - and refining a fund search as required - or presenting clients with a list of issues that might interest them and finding fund options from there,” she says.

Ms Dreblow believes drilling down into detail may not always be necessary.

“Many clients will simply say they want ‘sustainability issues’ to be taken into account, or they ‘want to avoid tobacco companies’, for example,” she says.

“It can, however, be essential for clients with specific needs, as fund strategies vary significantly.”

Ms Bioy points out exclusions from portfolios are an important consideration because of their potential impact on performance.

“Excluding certain sectors may affect your portfolio performance over short periods of time,” she warns. 

She says there are a number of questions clients should ask themselves, even before they approach their adviser about building a portfolio of ESG funds:

  • What’s my goal?
  • What am I trying to achieve?
  • Do I want market exposure with an ESG tilt?
  • Am I looking for some sort of ESG alpha?
  • Do I want to make an impact and invest in a thematic or impact fund, like gender diversity or renewable energy?
  • Where will these funds fit in my portfolio? 

“Some funds are suitable as core holdings, others aren’t because they are more concentrated and narrower, and those are only suitable as satellite [holdings],” she comments.

Overcoming the challenges

There are a number of challenges both advisers and investors may have to overcome as part of this process though.

Ms Bioy considers: “The challenge for investors today is assessing how sustainable their investments really are. There are tools out there investors can use.”

Morningstar launched its own sustainability rating two years ago, as a way to help investors evaluate their portfolios using ESG criteria.

Advisers face other challenges too, as Jason Hollands, managing director of business development and communication at Tilney Group notes, saying it “provides an added dimension of complexity into the fund evaluation, selection and monitoring process, on top of the normal due diligence required to understand how a manager runs money and approaches risk management”.

There is also the question of asset class, as Mr Hollands details.

“Building a diversified ethical portfolio provides additional challenges, as the level of product choice, while reasonable in equities, is much more limited in certain other asset classes and consistency of approaches across different fund companies is hard to find,” he explains.