To ESG or not to ESG? That is the question

Greta Thunberg, Extinction Rebellion, David Attenborough and extreme weather events are just a number of things that have raised awareness of the impact of climate change. These have made us consider the implications of everyday choices we make in areas such as food, fashion and transport. But what does it mean for investment choices, how do these affect IFAs and what can asset managers do to help?

Whilst negative publicity has made people question the effect of their investment impact, the question remains 'what changes should be made to a portfolio of investments?'. Against the backdrop of ethical investing with approaches such as negative and positive screening, the proliferation of Environmental, Social and Governance (ESG) products has only added to the list of questions with a multitude of metrics/methodologies which may put people off investing in them altogether.

Then vs now

In the last 30 years or so, we've seen large shifts in many different areas of society as we move towards cleaner and healthier solutions. Unsubsidised renewable energy is now most frequently the cheapest source of energy generation according to a report by the International Renewable Energy Agency (IRENA). We've seen the smoking ban and the 5p charge for plastic bags (and the subsequent use of re-usable ones) which now seem standard. Whilst many of these changes may appear 'sensible' it could be argued 'why wasn't this done before?'. In fact, whilst there is pressure to reduce plastic further (e.g. single use plastic straws) some might say we still lag behind some countries and their war on plastic. For example, Rwanda bans all plastic bags from entering their country, and that includes the security plastic you may have paid to have your suitcase wrapped in as you left the UK!

The changing consumer

The world's consumer is changing, meaning companies, IFAs and asset managers need to be aware of how this impacts investment opportunities. Social and environmental concerns that have risen to prominence in recent years, from the aforementioned headline grabbing protests to more small scale activities such as plogging (more on this later). This groundswell of sentiment will continue to play a bigger role in the decisions of firms, with those that can best adapt being more likely to boost sales, benefit from good PR and be considered for ESG investments.

Another dimension to consider is the demographic of the consumer. Researchi found that 53% of millennials stated that they often or always buy from companies that make an effort to reduce their environmental impact (vs 27% amongst Boomers). However, a significant finding in this research was that respondents with children and grandchildren articulated that whilst they had previously placed less value on sustainability issues, a concern for the world younger generations will live in was driving them to consider sustainability more in their lives.

Whilst there is varied demand across the demographics, millennials are set to inherit an estimated £1.2 trillion windfall from Boomers in the next 30 years, it's only a matter of time before it filters into mainstream advice.

Our solution for IFAs

We are able to offer the benefits of our established multi-asset investment approach through a sustainable lens with our HSBC Global Sustainable Multi-Asset Portfolios which prioritise:

  1. effective portfolio diversification,
  2. use of measurable sustainability criteria across all asset classes, and
  3. cost-efficient implementation of the asset allocations.

In common with our other multi-asset solutions, the objective is to maximise risk-adjusted returns with the additional benefit of reducing ESG-related risks.

We believe that sustainability issues can have a material impact on company fundamentals and performance over the longer-term. These issues are linked to opportunities and risks that financial markets may not be pricing appropriately. ESG scores provide a way to measure the sustainability of a company, country, index or fund. Carbon intensity provides another dimension when considering sustainable investment as it measures the impact of a company on the environment. By focusing on a combination of these sustainability metrics (i.e. higher ESG score and lower carbon intensity than the market average) portfolio holdings can be tilted towards companies and markets with higher sustainability qualities.

There has been the perception in the past that performance may need to be sacrificed for the benefit of doing good. There is now a growing body of evidence that ESG focused investment does not compromise financial returns and you could even argue that ESG investment is actually a way to future-proof investments because companies that run with ESG principles are more likely to remain solvent and prosper. To this end, an ESG solution may also be a method of future proofing an adviser business too, as well as accommodating the demands of clients who might be more inclined to invest in a company that is trying to cure cancer as opposed to cause it!

So what is plogging? It's a term for when a group of joggers combine their run with picking up litter. Will this change the world? No, but it once again shows the desire of ordinary people to make a difference. As asset managers and IFAs offer investment solutions for this growing sentiment, we can help to influence companies and have a positive impact on our planet and the people in it. So in answer to the question in the title, I'd argue it's the former!

The two HSBC Global Multi Asset Sustainable Portfolios (Conservative and Balanced) are risk rated with Synaptic and available on all major platforms.

  1. TWC Responsible Investment and the Retail Investor: Is the Industry Missing an Open Goal? Online survey, October 2017, n=1,000
  2. Study by Sanlam UK

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