ESG investing with impact

We have constructed three model portfolios with different ESG-related allocations.

These span an estimated 3 per cent allocation to climate change in a traditional equity-bond portfolio, a more diversified portfolio with a 7 per cent allocation and a climate-aligned portfolio with around 20 per cent of its assets assigned to climate solutions.

Our research shows these portfolios offer very similar expected returns and risk, but with very different real-world impacts.

This raises an exciting possibility. It suggests the strategic asset allocation process can be modified to create strategic portfolios with significantly higher capital allocations to finance the energy transition, but without sacrificing expected risk-adjusted returns.

By taking this approach, investors may be able to help close the climate-financing gap, without compromising investment returns or conflicting with fiduciary and regulatory constraints.

To have maximum effect, this high-impact strategic asset allocation must be coordinated with more ambitious government policy and efforts to accelerate technological change and encourage investor ingenuity.

It requires a shift in mindset: investors must realise they need not just passively respond to market forces, but can play a role in shaping a more prosperous and sustainable future.

Craig Mackenzie is head of strategic asset allocation at Aberdeen Standard Investments