Introducing our Responsible Portfolio Models

We know from our recent survey that 94% of advisers said that the topic of ESG/sustainable investing has come up with clients in the past 12 months and nearly half the time this was prompted by clients themselves.

Funds also continue to flow into this area, with globally listed exchange-traded funds focused on environmental, social and governance (ESG) strategies gathering net inflows of $7.6bn during February. This represented the 38^th month of consecutive net inflows and ESG-focused investments are on track to account for more than a third of total industry assets in the next few years.

We also know from the same survey that more than a third of advisers said they actively propose ESG/sustainable investments. We are therefore excited to make available to advisers a range of Responsible Model Portfolios (MPS) which we have been running as an in-house strategy for nearly five years. They build on our successful MPS range, offering the same target risk-adjusted returns with inflation plus outcomes. We will employ active asset allocation with predominantly passive implementation using exchange-traded funds with ESG/SRI criteria or a thematic focus. We also have the flexibility to incorporate some actively-managed funds to express investment ideas in the Responsible/ESG/

Ethical/Sustainable space that may not be readily replicated in a passive vehicle. We use MSCI methodology to assess the ESG credentials of the models. MSCI scores companies on a number of key ESG issues and identifies those that are leaders and laggards compared to their peers in each industry. Our Responsible Model Portfolios currently have the top AAA MSCI ESG rating, compared to A/AA for our other models:

Several of the ETFs held are tracking either ESG or Socially Responsible MSCI indices and these tend have exclusions for companies in industries such as weapons, tobacco, alcohol, gambling and genetically-modified organisms, as well as companies with high carbon emissions. Instead, the focus is on a best-in-class approach which selects companies with outstanding ESG ratings and minimal controversies.

We target enhanced ESG metrics for these models relative to the existing series and, as a result, they have lower carbon intensity and lower exposure to traditional controversial sectors such as tobacco and alcohol. Carbon intensity is based on greenhouse gas emissions data arising from both company-specific direct (Scope 1) sources for example produced by a company’s facilities and vehicles, plus indirect (Scope 2) sources such as the electricity and heating/cooling purchased. This information is particularly of interest for those concerned about climate change and the long-term temperature goal of the Paris Agreement to limit the global average temperature increase to 1.5°C above pre-industrial levels.

Our thematic investments include trackers focused on clean energy, batteries, clean water and sustainable food. Both clean energy and battery-storage technologies are critical to energy transition strategies and have been in focus recently due to energy security concerns. A transition to more sustainable food production systems and consumption patterns will safeguard our nature and ecosystems as well as helping reduce greenhouse gas emissions. Currently, 70% of global freshwater withdrawals are used for agriculture and food accounts for over a quarter (26%) of global greenhouse gas emissions.

The FCA is expected to consult on their proposed sustainable investment labels by the end of June so, in due course, we will be able to use this classification to help advisers and clients understand the features of our models and make easier comparisons.

Please note: This article was released prior to SDR and thus the information may not be in line with the Anti-Greenwashing rule but contextually is appropriate for the time it was written.