What sustainable investing means to us
A rise in demand from advisers and their clients for investment options that seek to consider both financial returns and positive environmental and social impacts has led to a raft of ethical, ESG and sustainable fund launches over recent years.
This is no fad or fashionable investing theme to us, nor is the launch of our own sustainable range a tick box exercise to ensure we fit in within the marketplace and satisfy regulatory requirements. We expect that the focus on ESG credentials is here for good and for all funds as we move in to the future.
However, many of the launches we have witnessed over recent times have successfully attracted assets, but perhaps more importantly for some, they have generated above-average financial returns. Our research indicates that a significant percentage of these returns have been achieved by investing in a concentrated selection of stocks. Though we are positive on the long-term outlook for funds run on a sustainable basis, we remain acutely aware of the need for long term diversification.
Our approach to sustainable investing
Research & experience
What we consider to be sustainable
Our experience tells us that investors who have a more ethical mindset tend to be more interested in the portfolio’s underlying positions.
Sustainable investing covers a broad church of investment strategies, and this means the discussions between adviser and client to confirm the investment’s suitability are particularly important.
Our sustainable portfolios look to balance the dynamics of delivering financial returns with the social consequences and environmental impact of the underlying holdings, by blending various sustainable funds. This balanced approach aims to construct more diversified portfolios using the strategies outlined here…
How we measure sustainability
The number of tools available for quantifying ESG characteristics has increased to match the growing demand for ESG compliant portfolios. These tools cover a wide range of funds and assets, and can help evaluate high-level ESG credentials.
However, it is challenging to quantify an area that is subjective and often driven by personal values and opinions.
We feel it is helpful to supplement a scoring system with our qualitative fund research. Using a third-party rating system combined with personal human oversight is a more pragmatic approach to what is undoubtedly a complicated sector.
IBOSS sustainable scoring
The IBOSS sustainable scoring is made up of two parts; Morningstar’s sustainability ratings and our own qualitative fund research.
This method provides a score, measuring the ESG risks and characteristics of the underlying fund holdings, allowing us to produce an average for the whole portfolio and assess funds on an individual basis.
The sustainable portfolios are constructed by the same experienced and trusted IBOSS Investment Team, who also manage our other MPS ranges, and are the hallmark of all IBOSS investment solutions.
Specific client requirements
We understand that all clients have different needs and preferences regarding investing, which is particularly true in the world of sustainable investing. These preferences frequently focus on the more controversial and often subjective investment themes of alcohol, armaments, gambling, tobacco, pornography, oil/gas and animal testing.
Our view is that by holding various funds with differing investment styles and approaches, the portfolio will provide diversification benefits reflected through performance over time. We believe that the same is true when blending funds with differing sustainability values, as implemented in the portfolios of our Sustainable MPS.
It is important to be aware that whilst we look to minimise portfolio exposure to controversial areas, we are simultaneously aiming to produce positive relative returns against a benchmark. This emphasis on diversification inevitably means compromises have to be made and the portfolios may have exposure to areas that some clients might wish to avoid unequivocally.
However, this may be a small percentage of the overall portfolio, so it is important for the adviser and client to agree on whether our investing approach is suitable for them.
Fund approach to controversial themes
We will provide you with the tools necessary to explain the current weighting to controversial areas and each fund’s approach to the sector. The chart below demonstrates each fund’s approach to the controversial investment areas and is extremely valuable as the overall weighting will change over time, but each fund’s approach should remain broadly consistent.
Exclude: The fund will not hold the sector under any circumstance.
Avoid: The fund will endeavour to avoid the sector within specific parameters i.e. a company must have less than 10% of revenue generated through armaments.
Include: The fund has no specific exclusion or avoidance policy. This does not necessarily mean they have exposure to the sector.
Portfolio exposure to controversial areas
Key characteristics of the IBOSS Sustainable MPS
The Sustainable MPS consists of seven risk-rated model portfolios run on an actively managed discretionary basis. In the same vein as our other investment solutions, the range is built specifically for financial advisers and will continue to evolve based on adviser feedback and the evolving investing landscape.
The sustainable portfolios closely mirror the asset allocation of the IBOSS Core portfolios, but are populated using funds that meet the IBOSS sustainable criteria.
Key Sustainability Features
- Demonstrable sustainability characteristics at a portfolio and fund level
- Accessible fund commentary and research
- ESG scoring and rationale of underlying funds and portfolio
- Constructed using funds with strong social/environmental values and within IBOSS’ sustainable criteria
- Supported by Morningstar’s external rating system ‘Sustainalytics’.