Taking Stock : How can I be sure my portfolio is green and not greenwashed?
As world leaders gather for COP-26, we reflect on how we can ensure our contribution towards a more sustainable future is supported by action to produce tangible results. In addition to 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 (ESG) 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, shares her insights.
Responsible investing is no longer a niche add-on for a small selection of companies. The Global Sustainable Investment Alliance notes that sustainable investments reached $35.3 trillion in five major markets at the start of 2020. This constitutes a 15% increase over two years (2018-2020), indicative of a shift in investors’ priorities. Sustainable investments make up 35.9% of total assets under management, that is 1 in every 3 USD invested.(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 (2) 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. Furthermoe, risks to investors might be reduced through the application of MSCI ESG controversies. As the name suggests, this overlay involves analysis of companies’ involvement in ESG controversies. We avoid companies that have harmful governance practices, or negative social events that may impact their stock price. Instead, we look at positive selection and the promotion of ethical stewardship.
Responsible investing is an ever-evolving practice and we are now analysing the carbon impact and ESG scores 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. As a leading responsible bank we encourage and support our employees to do their part. For example, in 2020 our employees donated 7,732 CSR (Corporate Social Responsibility (CSR) Hours and we directly supported almost 1,000 Individuals and Community Organisations/Charities.
If you would like to find out more about responsible investing solutions, please contact your Private Banker.
(1) The Global Sustainable Investment Alliance and Global Sustainable Investment Review 2020 (GSIR)
(2) A company leading it's industry in managing the most significant ESG risks and opportunities.