Steve Hunter, head of Business Development at Momentum Global Investment Management, considers how permanent ESG is in the market and the challenges faced by firms looking to advise their clients on this investment area.
It is hard to believe just how far sustainable investing has come in the last two years. 2021 could be seen as the year where investing with both impact and sustainability really came into its own within the retail investments market.
Flows into sustainable solutions came in waves over the years with talk of sustainable bubbles building up given the sheer weight of investment cash and opportunity. Sustainable investment solutions also enjoyed strong relative performance in 2020, while the more carbon-intensive businesses they avoid (which are more exposed to the global economic cycle) wilted under the full weight of the first wave of Covid-19.
Without doubt, the last two years have set the foundation across the investment landscape with a permanence of change for the future.
Changes on the horizon?
Early in 2021, European regulators introduced new fund governance requirements – specifically the Sustainable Funds Disclosure Directive (SFDR) relating to fund marketing with a sustainable focus. Article 8 legislation lays out the minimum criteria required for a fund to market itself as having significant ESG characteristics, whereas article 9 lays out similar requirements for sustainable funds with a focused objective such as climate change. Change is certainly on the horizon and UK regulators are likely to be looking at potentially introducing a similar framework in the not too distant future.
European regulators also took the opportunity to clearly define changes in the advice process to ensure client discussions embraced these elements as part of both the initial and ongoing review process. We are likely to see similar developments in the UK soon.
ESG and Sustainable funds on the rise
With the increase in flows, the market has seen a plethora of ESG and sustainable fund launches across a wide range of asset classes, giving investors increasing choice and opportunity. But that also brings increased complexity in achieving the right risk/return combinations that come with a threshold level of sustainable investment credentials.
Adviser challenges
Therein lies the key challenge for professional advisers looking to guide clients in this area. Creating portfolios with increased sustainability criteria whilst continuing to meet risk, return and (importantly) diversification requirements, and avoiding any greenwashing challenges, could create significant additional research costs within the advice process, unless approached in the right way.
Sustainable Model Portfolios
Sustainable model portfolios offer one potential answer for advisers to meet these evolving investor needs. Model portfolios have served investors well in many cases over the last decade. We are now seeing that expertise expand to encompass sustainable variants.
There is usually an additional charge for these services, but this can often be modest relative to the quantifiable benefits gained.
Clear advantages include the delivery and maintenance of required risk levels and diversification, coupled with clear return objectives and a positive ESG portfolio tilt.
With exponential growth in the range of funds available, advisers should consider outsourcing fund selection to highly resourced specialist investment teams who have the capacity to research this rapidly expanding market. Their expertise in combining funds efficiently and effectively can help ensure that investor portfolios remain current and relevant even as investment preferences evolve in the years ahead.
2021 feels like a turning point for many investors as well as the wider investment community – a step change in how people invest – and one that is unlikely to reverse any time soon.
