Responsible investing and pensions course  

How to manage responsible investing within a multi-asset portfolio

  • Understand the complexities of applying ESG criteria to multi-asset investing
  • Explain how multi-asset portfolios can fulfil stewardship responsibilities
  • Explain role investors have in fulfilling stewardship responsibilities
How to manage responsible investing within a multi-asset portfolio
Tesla was removed from S&P 500 ESG index in May 2022. (Patrick Pleul/Pool/Reuters/Fotoware)

Applying the principle or environmental, societal and governance-based investing to a multi-asset approach is not straightforward.

According to Laith Khalaf, head of investment analysis at AJ Bell, multi-asset portfolio managers who wish to take an ESG approach have a "difficult task" on their hands, because they have to apply ESG criteria across a wide range of instruments.

Despite this struggle, he adds that investors in multi-asset portfolios should remain hopeful, because there is now a vast amount of analysis on ESG-compliant equities, bonds and property, which makes the task more manageable.

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Khalaf says: “There are increasing amounts of ESG data available, not just on equities, but bonds and property too. Alternatively, multi-asset portfolios don’t have to invest directly, they can use active and passive ESG funds to populate their portfolios. So, rather than scrutinising the ESG merits of each individual holding, they can do so at the level of a pooled fund.”

Additionally, he says that as well as the ESG considerations, these funds need to take into account the usual principles of multi-asset investment; in particular the now almost ubiquitous risk rating that investors are accustomed to.

Khalaf says: "These funds fill gaps for ethical investors who are perhaps looking for a more conservative fund in their retirement, or perhaps as they approach retirement, which doesn’t take full equity risk but nonetheless allows them to meet their own ethical preferences.”

ESG complexity

Understanding how ESG, responsible investing and stewardship considerations can be adopted into a multi-asset investment approach means also understanding the complexities that come with this strategy.

This is because ESG metrics are complex, and being environmentally friendly is not enough to be considered compliant, because firms must also ensure their working conditions are exemplary too.

Laura Hoy, ESG analyst at Hargreaves Lansdown, explains: “ESG metrics are not one-size-fits-all. Tesla being removed from the S&P 500’s ESG index offers an example of this. The carmaker’s product is undeniably environmentally friendly, but concerns about working conditions mean governance is in question.

"There are some funds that would still consider Tesla as a responsible investment, while others with a more holistic approach to ESG would look to peers. ESG metrics work best when applied to a particular sector or subsection of the market.

"That means the responsible stocks in a portfolio with a value-tilt will be different from those in a growth fund. Ultimately, ESG ratings should be used just like any other financial ratio.

"On their own they’re unlikely to tell much of a story, but together with other metrics they’re a powerful part of an investment strategy.”

Hoy adds that resilient portfolios are those that take into account potential ESG risks and opportunities.

While this does not have to be exclusionary, it can sometimes mean passing up a company engaged in controversial practices.