What is important to one investor may not necessarily be the same to another. With databases containing hundreds of different ESG indicators reflecting various metrics, and with some firms self-reporting, unlike financial metrics, being able to compare ESG scores is inherently more complex.
We work with some clients/investors who have more specific ESG objectives and wish to better align their portfolio with very specific, personal values, more akin to impact investing decision-making, where return may also not be the key driver.
An investment adviser to this type of client or fiduciary services provider, on their behalf, will need to consider how to achieve meeting the clients’ ESG objectives in their investment advice, which will also require some focus on what the financial performance will be, balanced with the ESG objectives and supporting metrics.
As with any investment strategy, investors need also to determine their risk and return targets. Within an ESG portfolio, questions of target risk levels are critical as investors potentially could narrow their investment options through ESG criteria and therefore create possible sector/firm concentrations, which build in increased risk and potential impact on performance.
Furthermore, when constructing specific ESG portfolios, while the benchmark indices offer a single ESG score for an individual security using the same metrics to create and or evaluate a whole ESG portfolio, this assumes a common set of ESG values across multiple investors. The obvious risk here is that this does not align with an individual’s view of what their investment is achieving.
Impact investing and /or socially responsible investing is quite different in terms of the investment approach. In these circumstances an investor will wish to invest in a specific project, company or sector with the objective of positive impact, driven by moral / ethical reasons.
Accessing this type of investment is more bespoke and would be approached by way of a direct investment or through a specific fund.
UN Sustainable Development Goals
In these situations, many investment advisers would look to introduce a client to the various projects underpinning the Sustainable Development Goals (SDGs) which were adopted by all the member states of the United Nations.
The 17 Global SDGs seek to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. According to the UN development programme it estimates that $4trn of annual investment is required to achieve the SDGs by 2030 and the private sector will be critical in achieving this level of support through investment not through charitable donations.
It is fair to say that consideration of ESG factors is now widely embedded into decision-making process for all portfolios.
