Sustainable multi-asset investing needs simplifying

In his view, ESG is about “risk management” and by excluding businesses that do significant social harm or are badly run, he believes investors will achieve better outcomes.   

He says sustainable investing contains all of those elements of ESG, but additionally is about investing in businesses that may also help create solutions to the challenges facing the world. 

On net zero, we would ask: 'does a company have a target to achieve that, and does it have a medium-term target to reduce its emissions?' Kristina Church, Lombard Odier

He adds: “ESG investing is about excluding companies that do harm, while sustainable investing is about rewarding those companies that do good.” 

Kristina Church, head of sustainable solutions at Lombard Odier, says that ESG investing is very much centred on the preferences of the client, and the adviser’s role is to understand those preferences.

When it comes to sustainable investing, she applies three criteria: “On net zero, we would ask: 'does a company have a target to achieve that, and does it have a medium-term target to reduce its emissions?' And then one asks: 'well, if it achieves those targets, does it still have a business? How is its business plan impacted?'”

Andrzej Pioch, multi-asset investor at Legal & General Investment Management, sees the difference as: “ESG risk is predominantly about the areas a company operates in, while sustainable investment risk is about looking at how a business operates, in whatever sector.” 

Chris Hiorns, head of multi-asset strategies at EdenTree Investment Management, says he views sustainable investing as being “thematic” in nature, as a number of specialist funds have been created that enable investors to gain exposure to specific trends in the market, while ESG is the overarching name for different investment styles and priorities that focus on the wider question of how money is invested.

Craig Mackenzie, head of strategic asset allocation at Aberdeen Standard Investments, says his climate-focused multi-asset strategy presently has 60 per cent of its capital allocated to equities, which in a traditional multi-asset strategy would be considered suitable only for clients with the highest tolerance for risk, and a 15 per cent allocation to bonds. 

He says finding fixed income investments that are sustainable and an attractive investment tends to be more difficult, and he has invested in infrastructure assets as an alternative to equities. 

Among the funds he owns to gain exposure to infrastructure assets is Greencoat. 

Greenwashing

Advisers searching for appropriate multi-asset sustainable investment strategies for clients are faced with the problem of what to do about greenwashing, that is, the practice of businesses and providers adopting the language of sustainability, without really changing behaviour. 

McIntosh Whyte says: “You have to consider, in the first place, the pedigree of the firm and of the teams managing the money – have they been around for a long time or are they recent converts to the potential of sustainable investing?

"At Rathbones we use Greenbank, a firm within the business who are ESG specialists, and who have a veto on all of the investments we make in our sustainable multi-asset funds; they have been around for 20 years.”

Simon Holmes, multi-asset investor at BMO Global Asset Management, says: “Greenwashing is a very important issue because if clients see too many instances of it, then it would really harm the long-term prospects for sustainable investing.

"I think the key to finding funds that are doing it properly is transparency: what are they disclosing, and how are they disclosing it? And really it is likely that the firms that have been doing this for a while are the ones who will be transparent.

"The next question to ask is about how big the teams are that are doing this, and how much resource is assigned to it.”

Standardisation 

Clark Fenton, manager of the Diversified Return fund at RWC Partners, says: “Just as multi-asset is a broad term, which can be a misleading label, unfortunately, the same can be said for ESG and sustainability. 

"Until standards are better defined and agreed upon, investors will have to do more work to dig into funds’ underlying investments and processes to vet those which are genuine. Managers’ transparency of their processes and portfolios can facilitate investors’ assessment; opacity and obfuscation are warning signs."

John Fleetwood, director of sustainable and responsible investing at consultancy Square Mile, says the best approach is to “look at the evidence, look at the underlying companies that are being invested in and whether that matches the rhetoric of what the firm is saying”. 

Maria Municchi, fund manager at M&G, says: “There are efforts such as the EU taxonomy to build a framework to provide investors with a common language to make different investment approaches more comparable. Another way to help with comparing funds is to look towards external fund labels and third-party sustainability databases such as Morningstar, Fund EcoMarket or 3D Investing to better understand a specific fund approach.

"Last but not least, a detailed ESG/sustainability policy published by the fund manager could be a useful document for investors, providing information on the non-financial objectives, the responsible investment approach adopted to achieve them, and the criteria used to implement it (such as carbon footprint, alignment with sustainable development goals, minimum ESG thresholds etc).

"I believe that, while sustainable investment continues to evolve, transparency and communication regarding the fund’s criteria, approach and expected outcomes is crucial. For example, for our sustainable multi-asset strategies we publish a document describing our ESG and impact criteria as well as an annual report with details on the sustainable characteristics of our positive impact holdings and overall portfolios.”

David Thorpe is special projects editor at FTAdviser