How can I be sure my portfolio is green and not greenwashed?
With a new financial year around the corner, it is important to take time to evaluate your wealth plan. For many of us, the coronavirus pandemic has prompted a reappraisal of our priorities and a re-evaluation of our objectives. Beyond financial returns, there is an increasing desire to understand where money is invested and what the impact could be from an environmental, social and governance perspective.
What has been driving recent growth in responsible investment? How can you seek assurance that a portfolio will be truly green rather than just greenwashed? Delyth Richards, Head of Client Solutions Group, offers her insights.
The rise of sustainable investment is well publicised. The Investment Association notes that £7.8 billion was placed in responsible investment funds between January and October 2020, accounting for almost half of all net money placed into funds. This is four times higher than during the same period in 2019, constituting a real shift in investors’ priorities. In October 2020, over £1 billion was placed into responsible investment funds – the highest monthly total on record. (1)
For some years the responsible investment movement has been driven by the large investors of pension funds. However, private investors have a growing voice and companies are providing data to support these enquiries. The past year has reinforced that the social and environmental themes which underpin responsible investing have a direct influence on the future of our society. Increasingly, individuals are seeking to harness the power of capital to effect positive change.
It is often difficult to know whether a portfolio is truly green or simply labelled green. A cacophony of conflicting labelling means that it is not always clear if what you are buying does what it says on the tin! The vast array of jargon and acronyms in this field can be confusing, so let’s define the three main buzzwords.
Ethical investing encompasses negative screening processes to exclude so-called “sin stocks” from portfolios – for example, stocks in companies that generate substantial revenue from controversial weapons, tobacco, gambling, thermal coal and adult entertainment.
ESG – Environmental, social and governance – investing involves assessing and investing in companies that perform well around issues of climate change, labour standard (for example strong commitment to diversity and inclusion) and corporate governance.
Impact investing means investing in companies which have a measurable, beneficial social or environmental impact.
What does responsible investing mean at Kleinwort Hambros?
At Kleinwort Hambros, portfolio construction is driven by our VaMoS investment process: thorough analysis of valuations, momentum and sentiment. We negatively screen businesses that generate more than five per cent of their income from adult entertainment, gambling or have any association with controversial weapons such as cluster munitions or landmines. This is the starting point for all portfolios.
Dedicated responsible investment strategies offer an opportunity to have a greater positive impact. We construct responsible portfolios by using a methodology to select companies with an aggregate environmental, social and governance (ESG) rating above, or equal to, AA as measured by Morgan Stanley Capital International (MSCI). We are also beginning to introduce impact funds in some portfolios where appropriate. For example, the Pictet Global Environmental Opportunities impact fund invests in companies which focus on creating resource efficiency or improving environmental quality.
Balance and performance
When creating a responsible portfolio, there are natural concerns that negative screening of certain sectors will lead to reduced diversification. Currently, there are challenges in finding alternative asset classes (hedge funds, commodities, etc.) that score highly from an ESG perspective. However, this is a fast-moving space and we will soon see such investments become available. We run a lot of analysis that satisfies us that the exclusions in place do not lead to underperformance.
Screening out some high-income sectors, such as tobacco, can result in too much of a portfolio being invested in a small number of sectors, ultimately impacting income. However, responsible portfolios can be structured to create a target income for clients and there is evidence that such portfolios may perform better in the long term. Due to the rising demand for responsible products and services, as well as government support, companies that embrace responsible practices can benefit from favourable taxation, reduced borrowing costs, and potentially lower risk.
Responsible investing is an ever-evolving practice and we are currently analysing the carbon impact of our portfolios. We believe that demand for responsible portfolios will only increase in coming years.
Actively embedding aspects of responsibility throughout our business is a fundamental part of Kleinwort Hambros’ long-term strategy. We have set the bar high in saying we want to be recognized for leadership across all aspects of responsibility, including how we support our clients, manage our investments, business and our staff.
If you would like to find out more about responsible investing solutions, please contact your Private Banker.