Sustainable portfolio management solutions

I had recently the opportunity to test some friends of mine asking them how sustainable was their portfolio. None of them was able to give me a clear and concrete answer. They recognized the current environment issues and the critical situation due to the Covid-19 but they never asked themselves how their money could help solving problems with keeping expected returns.

Which was quite a surprise for me knowing that a CFA Institute survey stated that 39 per cent of retail investors said they were very interested in ESG investing in 2019, and the same percentage indicated potential interest in the future.

Interest confirmed with the Covid-19 crisis as Morningstar data shows that 70 per cent of sustainable funds in the US rank in the top halves of their categories. And, 2020 also saw record inflows into sustainable funds.  The first part of this year has confirmed that companies and funds with high ESG considerations outperform, despite volatility.

Ultra High net worth individuals find a way to achieve these goals through Private Equity/Private Debt, investing their money directly in companies with explicit goals : this is Impact investing. For those who are not so rich, as my friends unfortunately, they can just read and learn from wealth managers’ publications written on their product offering. And they are numerous as Sustainability is seen as a megatrend among them.

And, effectively, only some wealth managers have already built up their capabilities for sustainable finance, including direct or indirect research, involved portfolio managers and trained client advisors.

So what about my friends? It seems this does not reach them through the traditional investing process. And why? I would explain this by the fact that Sustainable Investing is still a top-down approach today. Meaning that first the governments make the big commitment to support the UN Sustainable Development Goals (SDGs). Then, this has been then translated mainly through the implementation of ESG (environmental, social and governance) metrics that are included into their fund and security selection. But without any clear view at their own portfolio level.

Some rare wealth managers aim to achieve a higher than 90 per cent ESG rating in their recommendation universe. They have potentially developed an in-house methodology to assess funds, comprising qualitative and quantitative criteria in several relevant categories. At FIA AM, it is business as usual for instance. This includes ESG practices, exclusions criteria, voting and engagement policy, due diligence, portfolio manager ’s interview and allow us, at the end of the selection process to score each fund and complete our investment universe.

But how my friends could then take profit of all this analysis, as having a sustainable investment universe and promoting it is not sufficient for their entire portfolio? Hopefully, few wealth managers have developed a distinctive range of products by creating sustainable discretionary portfolios.

FIA AM offers investment insurance solution based on the UN’s 2030 sustainable development goals, thanks to which it is possible to produce positive and measurable impacts on communities and the environment. Each investment fund is aligned with one or more SDGs and the same alignment is identified at the portfolio level and communicated to the client. The investor is also able to benefit from bespoke portfolios based on thematic investments, selecting one or more SDGs to invest in if he prefers to focus more his investments.

At the end of the day, the individual investor can have a portfolio giving a clear and concrete impact on the planet and receiving a better return than traditional investment, as a recent Morningstar study showed that the majority of sustainable strategies have outperformed non-ESG funds over one, three, five and 10 years.

And I will make the wish that, during the next dinner conversation, all our friends will not only compare between them the performance of their respective portfolio, relative to their own risk profile of course, but also their impact on the planet and be proud of it.

Charles Lamoulen

Head of Portfolio Management at GreenEthica by FIA AM