Multi-assetOct 31 2022

How well does ESG marry with multi-asset?

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How well does ESG marry with multi-asset?

While environmental, social and governance investing has grown in popularity in recent years, there remain those who feel cautious about investing solely in ESG.

Some investors prefer to incorporate ESG into a multi-asset portfolio, as a sustainable and ethical feature alongside more traditional investments.

As the topic opens up and investors grow increasingly sophisticated, challenges arise that threaten to squeeze ESG out of multi-asset portfolios.

One of these challenges is the current lack of clarity around what constitutes an ESG investment.  

Will Mcintosh-Whyte, fund manager of the Rathbone Greenbank Multi-Asset Portfolio Funds highlights the debate around definitions: “The term ‘ESG’ by itself doesn’t mean very much and isn’t really a specific way of investing”, he says. 

This approach can offer investors diversified solutions across equities and bonds, delivering real-world impact as well as financial returns.Aliki Rouffiac, Robeco

According to Mcintosh-Whyte, the present situation has led to “some new, and some old debates, regarding responsible investing – some of which are opportunities and some which may lead investors to move away from the space.”

He believes that due to the lack of widely accepted definitions, some funds which are marketing as ‘ESG’ have come under scrutiny following the political instability in Ukraine.

“For example, there have been new discussions on whether defence and nuclear power companies belong in ‘ESG’ funds.

"Some investors would be shocked that these companies would ever be included, while others would advocate that they deserve a place, due to their importance in providing countries with social and energy security.” 

Ukraine's impact on ESG in multi-asset funds

He says the war in Ukraine has therefore highlighted that the lack of consistent definitions of what constitutes an ‘ESG’ or ‘sustainable’ fund may have led to some people investing in funds which don’t actually align with their values.

For example, investing in an ESG fund thinking there would be no defence companies or oil and gas companies – then finding out they hold them.

Giles Goghlan, chief market analyst from HYMC agrees. He says: “Beyond energy concerns, the war in Ukraine has instigated another debate around the inclusion of weaponry and defence stocks in ESG funds.”

This leads to the debate of whether ESG is about helping people invest in line with their own personal values, or whether ESG needs an objective assessment about societal, global and true economic sustainability and how this is assessed. 

Alignment with the UN's principles

A robust test and protective measure against non sustainability-friendly activities being incorporated into ESG and multi-asset portfolios is the introduction of the UN’s Sustainable Development Goals, reflected in the United Nation’s Principles of Responsible Investment. 

Aliki Rouffiac, portfolio manager in Robeco’s Sustainable Multi-Asset Solutions team takes an impact focused approach measured against UN Principles when it comes to ESG and multi-asset portfolios.

That is, “investing in specific themes that are both measurable and quantifiable.”

Rouffiac says: “This approach can offer investors diversified solutions across equities and bonds, delivering real-world impact as well as financial returns.

"This approach is most effective when combined with engagement policies that are used to address concerns around specific issues, working towards a successful resolution.

We believe clarity and transparency is crucial for sustainable funds to be successful.Will Mcintosh-Whyte

"We use Robeco’s Sustainable Development Goal framework to assess company contributions to UN Sustainable Development Goals for integration into investment portfolios."

Such measurement, monitoring and reporting on impact allows for a direct and transparent link between the portfolio’s holdings and the investments' alignment to the 17 UN Sustainable Development Goals.

The UN SDGs comprise targets for 2030 to meet a range of human rights and climate protection goals - and the UN PRIs are linked to these.

Both enable companies to apply a standard, and framework to their investments, in order to identify whether and to what extent they are truly responsible and sustainable when it comes to human rights and climate protection.

Mcintosh-Whyte says: “If confusing messaging isn’t allowing people to do this, there is a risk that people begin to lose trust in its benefits and accuse funds of ‘greenwashing’.

"We believe clarity and transparency is crucial for sustainable funds to be successful."

The recent geopolitical uncertainties due to the war in Ukraine and the subsequent humanitarian disaster, have put energy and food security, safety and independence at the forefront of the policy agenda for global governments.

Innovations 

There have been innovations in terms of saving energy, producing clean energy and diversifying energy suppliers in order to reduce dependence on Russian gas and oil. 

Rouffiac says she believe this “will speed up the energy transition accelerating investments in renewable energy, which will serve as a tailwind for a number of investment themes in the clean energy, clean industry and saving energy space.

"In the UK, renewable energy investment companies will play a vital role in plugging the energy gap and to ensuring the UK reaches its 2050 net zero target.

Generally, we think ESG needs to be active to be done properly.Tim Morris, Russell & Co

Similarly in the US, focus on renewable energy spending aims to lower inflation over the long run and is expected to support the clean energy economy.

This bodes well with impact investing in areas that target several UN Sustainable Development Goals. Integrating forward-looking sustainability metrics in portfolios allows savers to invest in companies that provide solutions to tackle these challenges.

This approach allows the debate to move on from historical ESG opportunity/threat to what the sustainability focus and impact investing could deliver.

Together with an impact focused approach to investing in ESG as part of a multi-asset portfolio, there are a range of other approaches. 

Passive vs Active

Coghlan discusses the difference between passive ESG funds, and actively managed ESG funds, and some of the advantages and disadvantages as he sees it. 

“Compared to actively managed funds, which may own fewer companies, passive ESG investments tend to own a bigger portion of the market (more companies), which limits the level of involvement they may have with each one."

Active funds give investors more freedom to choose businesses that align with their ESG philosophies as opposed to those that simply don’t do harm to them.

Passive investment funds tend to exclude companies entirely to meet ESG requisites, rather than seeking businesses who are having a positive impact. 

Active funds can drop companies that do not align with their philosophies, whose sustainability credentials are questionable, or whose practices begin to change.

In a passive, tracker fund, the end investor is unable to sell their position if a company refuses to meet the standards that ESG investment require.

That said, they can apply some degree of pressure, which could foster change in the long run.

Tim Morris, adviser at IFA firm Russell & Co also supports active funds when it comes to ESG.

He says: “Many different ESG strategies can work well as part of a balanced multi-asset portfolio.

"Generally, we think ESG needs to be active to be done properly. We think shareholder engagement and voting is a critical aspect of any ESG strategy.

"My preference is for impact or strategies targeting innovation and looking to disrupt markets as I believe this is the most aligned form of ESG.”

Anita Boniface is a freelance journalist