The world of environmental, social and governance (ESG), and ‘impact’ investing is high on the agenda for many next generation financial planners and wealth managers. But a key issue persists: does ESG investing mean compromising on returns?
New Model Adviser® editor Will Robins sat down with Damien Lardoux, portfolio manager at EQ Investors; Jamie Innes, investment analyst at Tribe Impact Capital; and Max Pieters, IFA at Westminster Wealth Management to discuss all things green. Pieters told our panel his firm still requires him to include a risk warning when advising clients on ESG portfolios.
‘There are academic articles on both sides of the argument, but from a cultural top-down perspective as a company, I have to tell clients [returns could be lower as result of using ESG funds],’ he said. ‘Clients might like the value side of it, or they might like that they are fully divested from fossil fuels. But I have to say they could be compromising long-term returns and risking greater volatility.’
Innes said MSCI had built indices based on ESG momentum or high ESG scores, which have both outperformed the index over the eight years they have been established. ‘Responsible investing is just good investing,’ he said. ‘You are investing in high quality companies and avoiding those likely to suffer drawdown from environmental or social risks.’
Innes said he looks at companies dealing with the biggest global challenges. ‘Fundamentally, everyone is going to need fresh water, better healthcare, clean energy. It makes sense to focus on those areas.’
Lardoux, who is portfolio manager at EQ Investors, which runs a series of positive impact portfolios, highlighted the importance of making the investment case to clients.
He said: ‘Your portfolio has exposure to tobacco, fossil fuels, a numbers of industries that over the next 10 years may not be around, or may not be able to grow their revenues over time, because their market is going to fall.’
In initial discussions with clients, Pieters avoids starting with a ‘binary’ question of whether they want to invest ethically or not. Instead he advocates an open approach, asking clients what matters to them.
‘Answers to that have included everything from pollution, climate change mitigation, renewable energy, healthcare, education, child labour and slavery,’ he explained. ‘My clients aren’t all ethical clients – this is just them putting down their values.’
Innes said he uses a set of cards on which the United Nations’ sustainable development goals are printed.
He said: ‘You see people thinking: “if I want to reduce climate change, I need to think about education, because educating women in developing economies is one of the biggest drivers in mitigating climate change”.
‘We have done it with all of our clients, including an 11-year-old girl, the daughter of a client, and built a dummy portfolio for her.’
Alongside the specialists, talk of ESG approaches is cropping up more commonly in the funds of the big name asset management groups. However, Lardoux was sceptical.
He said: ‘There is a risk of greenwashing. Some companies will claim they are having a positive effect on the environment, but when you go under the bonnet and look at the underlying holdings, they are clearly going in very different directions.
‘It will require a lot of due diligence to demonstrate that intent is matching practice.’