The Final Frontier

Sustainability has been the hot-button topic for investors over the past 18 months. In 2020 European sustainable mutual funds and ETFs saw record breaking flows – £200bn, representing 45% of the years flows1. At HSBC Asset Management we have always maintained that responsible investment is key to our management process and launched our first SRI fund in 2001. Over the past 20 years we have developed five tenants for success in this space.

"It's true, that some areas of the sustainable universe do appear to be overbought. That being said, there are significant investment opportunities with companies that might not be obvious beneficiaries of the transition or are in emerging industries where investors have yet to realise the sustainable potential."

1. Risk management is imperative

When the subject of sustainability is raised, there are some topics that always seem to come up: the market for solar power, the potential for biodiesel, and the demand for electric cars to name a few. All are interesting and valid topics, but they only represent one side of the investment equation: the opportunities for sustainable investment, while ignoring the other side: risks. Sustainable investors have a wide array of risks to manage, and doing so effectively can be the making, or breaking, of a successful ESG strategy. Extreme weather events causing physical asset damage, the transition to a net-zero economy resulting in stranded assets, carbon pricing, regulatory change, governance failures, gender equality, and monitoring supply chains for everything from modern slavery to conflict minerals. In short, considering the opportunities created by ESG simply isn't enough anymore, the really effective strategies are just as focused on what can go wrong as on the potential upside.

2. Sustainability or diversification? You no longer have to choose

There was a time when investing sustainably meant simply excluding oil, tobacco and gambling from portfolios, but this rightly raised concerns around lost portfolio diversification. We believe instead in using positive screening and active engagement to identify and support sustainability leaders, regardless of industry. This approach coheirs with the EU's net zero PAB initiative, which highlighted that sustainability issues like the transition to net zero can't be accomplished by climate focused corporations alone, and must instead involve a broad-based coalition of companies across every sector.

Furthermore, ESG investment is no longer confined only to equities; from the record issuance of green, social and sustainability bonds (Moody's projects $650bn in 2021), to the launch of Investment Grade and High Yield Bond Sustainability indices by Bloomberg Barclays and ESG Emerging Market Debt indices by J.P. Morgan, investors are now able to construction highly diversified sustainable multi asset portfolios, built for clients of various risk tolerances and long-term goals.

3. Sustainable investment is here to stay, but some assets might be overbought

With a glut of ESG fund launches and some £1 billion a month flowing into responsible investing funds in 20202, it's no wonder there are concerns about stretched valuations. Coupled with concerns that sustainable investing means sacrificing returns, with some 64% of respondents in our survey believed investing this way means losing out financially3.

It's true, that some areas of the sustainable universe do appear to be overbought. That being said, there are significant investment opportunities with companies that might not be obvious beneficiaries of the transition or are in emerging industries where investors have yet to realise the sustainable potential. This is why a strong research capability and dynamic approach is key to future success – by adopting a valuation-based investment approach we can avoid falling foul of bubbles; buying when markets are looking cheap and selling into strong investor demand.

4. Integration is simply the first step

Incorporating sustainability considerations into the investment decision making process (commonly known as ESG integration) is the first step in creating a sustainable investment strategy, however it is far from the only requirement. Of equal importance is a consistent, co-ordinated, and compelling engagement agenda focused on strategic discussions with the senior management of investee companies. Such discussions should be co-ordinated with voting decisions, which can serve as an effective tool to escalate concerns when other engagement has proved ineffective.

5. Investing sustainably is difficult and requires specialist skill

While sustainable investing is very much in vogue, it requires a different investment framework from traditional portfolios. This is due to the lack of a standard taxonomy, inconsistent data sources, and inadequate transparency/engagement on the topic with some market participants.

Tackling these complexities requires an investment manager to hold three attributes: first a dedicated team with a specialist set of skills as comprehensive analysis of the sustainability characteristics of investments across fixed income, equity and alternative asset classes is vital. Second, an advocacy program focused around improved industry standards and transparency. And third, comprehensive reporting to assuage concerns of greenwashing. Such reporting should clearly articulate the details of the sustainable investment strategy and include an account of engagement activities: voting record, detailed case studies of recent and ongoing engagement projects, and descriptions of tangible consequences of the above on corporate performance.

The following strategies are risk-rated by Synaptic

• HSBC Global Sustainable Multi-Asset Cautious Portfolio.
• HSBC Global Sustainable Multi-Asset Conservative Portfolio.
• HSBC Global Sustainable Multi-Asset Balanced Portfolio.
• HSBC Global Sustainable Multi-Asset Dynamic Portfolio.
• HSBC Global Sustainable Multi-Asset Adventurous Portfolio.