By Iain Ramsay, Chief Investment Officer, AHR Private Wealth

Investing in a socially and environmentally responsible way is not new. For decades, those in the financial services sector have known that to help tackle the issue of global warming and irreversible climate change, we need to hold businesses to account for their carbon footprint. So often, cash is king, and diverting investments to businesses and sectors which favour environmental responsibility is the best way to show a desire for change.

The search for sustainable investment opportunities has also recently been accelerated by the coronavirus pandemic. More than half of investors today are likely to take sustainability into account when making investment decisions.[1] A combination of banks, insurers and investors – worth in excess of $130 trillion vowed to put tackling climate change at the heart of their efforts, in a bid to align with global net-zero pledges and climate considerations.[2] This is just the latest in a long line of industry and governmental policy changes that reflect the need for environmental accountability.

However, for the everyday investor, understanding how to navigate the often complex world of bonds, equities, derivates and many other asset classes can be hard enough, let alone knowing which are also genuinely sustainable. Creating an investment strategy that prioritises sustainability, social responsibility and ethical standards demands specific knowledge. It should also rely on solid investment principles, but currently these waters are muddied.

Currently, there is no standard measurement for the ESG performance of investment opportunities and this creates challenges for investors, as well as the advice professionals that serve them. Greenwashing is the newest buzzword and it’s only going to fall further into the limelight

Cutting through the noise to offer value

At its core, sustainable investment portfolios should demonstrate a commitment to sustainable business practices and positive impact. However, as with any other type of investments, understanding investor’s needs and values is essential to building a portfolio that offers relative value.

As such, a key part of providing ESG aligned advice is primarily, a deep understanding of client objectives in relation to sustainability goals. Advisers should start by establishing what their clients’ interests in sustainability issues are, and how these can connect to investing objectives, so that they can in turn provide a clear outlook of what the ESG portfolio could look like.

Additionally, whilst some clients might wish to simply employ a screening for companies that have strong ESG scores by using third party sites, others will want to actively seek companies that are positively contributing to global sustainability in areas such as renewable energy and gender diversity. Some funds which pledge to do ‘no harm’, will instead screen out companies breaching any environmental, social and governance principles such as those in the tobacco or fossil fuel industries. Those objectives will result in a very separate criteria for investment selection and may impact risk management and investment performance objectives differently.

With a clear understanding of the goals and requirements of their clients, advisers can offer more tailored advice. However, they should also do this with a view to build a long-term relationship. Increased regulation and widespread awareness about sustainable investing is only going to continue on an upwards path and this will help both advisers and clients to understand more clearly the sustainability criteria of their selected investment products. As a result, companies marketing themselves as ‘ESG’ focused, and who have no clear ESG mandates are likely to get rapidly caught up by regulations such as the EU Sustainable Finance Disclosure Regulation (SFDR).

Finding the true value of green bonds and ethical investments

The other side of the coin from understanding just what clients mean when they say they want to ESG optimise their investment portfolios is knowing where to find such assets.

The financial value of sustainable investments has long been questioned, however, ethical funds have regularly performed well compared to other funds and continue to do so, with Morningstar reporting that over 50% of sustainable funds had performed better than their traditional counterparts in 2020.

This is partly due to the fact that those funds were less exposed to the sectors which struggled during the pandemic. A good example of the correlation seen between ESG principles and fundamental investment criteria, is the fact that those companies with effective corporate governance tend to deliver greater shareholder returns over the long term. Companies that have strong ESG criteria also have strong fundamentals that would traditionally qualify them as attractive investment opportunities, and advisers can therefore combine the two to deliver effective client outcomes.

Advisers also have various processes available to them to go about finding the right fund for their clients, including the introduction of thorough investment screening processes alongside any sustainability screening processes to ensure returns and value remain a priority. In addition to that, better-run companies also tend to be more robust in the face of potential scandals or market volatility. By helping investors develop long-term aspirations in line with their values and by guiding them through the right screening processes, advisers can strengthen clients’ portfolios with stronger and more purpose-driven investments.

[1] https://www.aviva.com/newsroom/news-releases/2020/10/interest-in-esg-investing-boosted-by-covid/

[2] https://www.reuters.com/business/cop/wrapup-politicians-exit-cop26-130tn-worth-financiers-take-stage-2021-11-03/