How well does ESG marry with multi-asset?

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.

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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. 

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.