ESG can be challenging for clients

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Investment Trends Research Director, Recep Peker
Steven Glass of Pengana International Equities, Michael Blaney and Jeremy Dean of Pendal Group

Despite a growing focus on environmental, social and governance (ESG) investing by investors, designing client portfolios that sustainably satisfy the criteria for ethical and responsible investing can be challenging.

This was one of the key outtakes from the IMAP webinar on responsible investing held on 4 August, 2020.

“ESG can be a very challenging conversation to have with clients, but it’s also an opportunity to develop a deeper relationship with them,” said Jeremy Dean, the Head of Responsible Investing Distribution at Pendal.

“But advisers need to understand a client’s behavioural finance bias when it comes to investing, which is complex. That’s because ESG is more than just having certain values around investing.”

It was a view supported by Zenith Investment Partners Head of Real Assets and Listed Strategies, Dugald Higgins.

He said responsible investing was a broad landscape, which meant there were a number of key elements that advisers needed to consider when constructing ethical portfolios for their clients.

“Firstly, advisers need to remember that when it comes to responsible investing, one size does not fit all. You need to consider there are many different indices in the market and a seemingly endless range of ethical issues to consider,” he said.


“Then you need to define responsible investing. There are many different definitions and value sets. Your definition on socially responsible investing (SRI) is likely to be different to others.

“And then you need to decide how ESG methodologies will be implemented. Can you invest ethically without compromising your values? Advisers need guiding principals to help them navigate ESG investing.”

A framework to use

Dean offered a possible six-step framework that could provide advisers with these guiding principals for the implementation and portfolio management of ESG. They are:

  • Identify the objective. This includes understanding what the client is looking to achieve as part of the responsible investing process. For example, they may want to feel good about ESG investing or require a greater connection between their values and the investments.
  • Gather relevant information. Source information from investment managers and research houses, but remember, gathering information is not always easy. There is a huge amount of information available in the marketplace that advisers need to navigate.
  • Look at the o Can you actually implement the ESG strategy you want and in what way will you do it - managed funds, managed accounts, direct holdings? What course of action can you take to achieve your client’s objective? What strategy solutions are available?
  • ‘What if’ questions. These are red flag events. For example, when changes occur in an investment strategy or as a result of acquiring poor ethical companies. What action do you take to rectify these red flag events?
  • Made a decision. Stop procrastinating and take action.
  • Review and engage. This is a standard part of the ongoing advice process.

“By implementing a framework like this around responsible investing can lead to richer and deeper conversations with clients,” Dean said.

Multi-asset portfolio

According to the Head of Multi-Asset at Pendal, Michael Blayney, when it comes to combining ESG decisions into a multi-asset portfolio, advisers and managers first need to define at a high level what it is they are trying to achieve with their approach to responsible investing. This includes determining their philosophy towards ESG and sustainable investments.

“Once you’ve defined that, you need to look at the different asset classes. For example, with Australian Equities, you may need to implement screens and positive tilts towards sustainability, while with Fixed Income, part of your overarching philosophy might be to achieve positive impact. So, you can incorporate positive impact there where it would be much harder to do with an asset class like Australian Equities.

“And then with Global Equities, while you might be comfortable with the developed markets, you need to consider how you feel about some of the emerging markets with respect to governance. If your philosophy encompasses the position where you’re comfortable with ‘less good’ but improving governance, then you might be happy with some of those countries where the governance is currently not as good but it’s changing in the right direction. That catalyst for change can be a catalyst for the re-evaluation of assets.”

Ultimately, when it comes to combining ESG decisions into a multi-asset portfolio, Blayney said it comes down to implementing a top-down set of principles, which may include some negative screens, that need to be as consistent as possible across all the underlying asset classes.

“This includes a case-by-case implementation of those principles within each asset class, taking into account specific investment characteristics and nuances,” he said. 

Michael Blayney of Pendal Group talks in an IMAP webinar about "How do ESG decisions get combined into a Multi Asset Portfolio? "
ESG and returns

For Pengana Deputy Portfolio Manager and Analyst, Steven Glass, when it comes to ESG investing, a key point that advisers should remember is that responsible and ethical investing doesn’t mean compromising an investor’s returns.

“The role of the ESG manager is to target solid returns while ensuring the ESG compliance of the investment,” Glass said. He added that by doing so, ESG managers were often able to provide investors with investment returns that were comparable, if not better, than average market returns.

Blayney agreed, saying that investors did not have to sacrifice returns or increase their risk by taking an ESG approach to investing.

“There’s no denying there is a growing focus on sustainable ESG investing by governments, regulators and investors. While ESG will mean different things to different people, this remains a rapidly growing and exciting sector to be in.”

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