Advisers should look beyond sustainability metrics

In an area of increasing product launches in which data and regulation are still playing catch up, panellists at Square Mile and ESG Clarity’s recent Responsible Pathway event said qualitative research is key for financial advisers when deciding whether to choose a sustainable, ESG or impact fund.

The overriding message from the event, a two-day conference at King’s College, Cambridge, where advisers heard from portfolio managers in five panel sessions and in structured networking groups, was: “Don’t rely too much on what metrics say but if you ask us we should have a reason for each investment in a portfolio.”

One of the points raised was when it comes to data and metrics, some areas of responsible investment are clearly lacking – such as in biodiversity.

Craig Cameron, portfolio manager at Franklin Templeton, said most companies still aren’t aware they have an impact on biodiversity, whether that’s positive or negative.

Further up the chain, there is still uncertainty about how to measure biodiversity risk from a strategic asset allocation perspective, added Rhys Petheram, head of environmental solutions at Jupiter Asset Management, in the panel on the topic.

Metrics don’t always present the full picture, either. A fund may tout its low-carbon credentials, but be mainly invested in low-carbon industries, such as technology or healthcare, for example.

Looking beyond the numbers

It’s early days for portfolio companies to have to disclose sustainability metrics, and not all jurisdictions are the same, Brunno Maradei, global head of responsible investment at Aegon Asset Management, said in the panel on responsible investment in practice, even when the messaging is clear.

This is where regulation and standardisation can be useful.

Commenting on the recent news in the UK that the Financial Conduct Authority is considering whether to regulate ESG data providers, Ella Hoxha, senior investment manager at Pictet Asset Management, said uniformity among ratings is welcome.

Samuel Mary, senior vice-president at Pimco, commented larger standards, such as the science-based Targets initiative, and international benchmarks help provide this uniformity of data and reporting too.

Using these, fund managers can signal to advisers their portfolios are sustainable by aligning with 1.5 degree targets or with UN Sustainable Development Goal targets, “but other than that it’s qualitative,” Marianne Harper Gow, ESG specialist at Baillie Gifford, said.

Asking managers about their engagement efforts can help advisers look beyond the numbers.

“You’ve got to have engagement, but you’ve got to have credible disruption,” said Charlie Miller, climate strategist at Legal & General Investment Management.

“‘Credible disruption’ can arise from power in numbers,” he added.

It can also arise from divestment, but only when there is a tipping point and enough capital to pull, Maradei and Gow agreed in the panel on responsible investment in practice. “Divesting from Shell today doesn’t impact if Shell will make oil tomorrow,” Maradei commented.

Client outcomes

Ultimately, if this is explained to clients, and managers do what they say they’re doing, concerns of greenwashing can be lessened.

“We don’t know what’s green so we don’t know what’s greenwashing,” Maradei said. “Make sure you do what you say you do and make sure your clients understand that.”

Green values aside, the panel also discussed whether sustainable investments are suitable for advice client as client outcomes are what concern advisers, one delegate said during a break. ESG funds do need a longer-time horizon, Gow said.

In emerging markets, “if you want to have impact you have to take risks,” Miller said, so they may be more suited to clients with more risk appetite.

Similarly, the panel on thematic investing debated whether or not sustainable thematic funds were suitable for more than satellite positions in portfolios.

Overall, however, understandably the resounding answer was yes, sustainable investments are suitable and necessary – and advisers can ask their fund managers to prove it.