Sustainable investing has now become a key element that the majority of investment management firms are integrating into their investment processes.
As such, investment managers like Quilter Cheviot’s Vanessa Eve, do not believe it will fundamentally change the multi-asset investing approach.
Investors will still need strong diversification from different types of assets to smooth investment returns over time, Eve says, but what will change is the sort of investments seen within portfolios.
She adds: “More emphasis will be placed on those firms who are adopting the UN-backed principles for responsible investment, as well as companies that align their strategies to the UN’s sustainable development goals.
“These principles are being extended beyond company shares and can now be found within fixed interest assets.
“As such, you can still adopt a multi-asst approach with a focus on sustainable investing. And with the next generation of investors more inclined to support investments that have a sustainable focus, this facet of investing will become a normal part of the research undertaken when adopting a multi-asset approach.”
Challenges of sustainable investing
Multi-asset funds that follow a sustainable investment process are naturally more complicated than single-asset strategies.
Even attempting to agree a fixed definition of sustainability is so difficult at the moment, that Rahab Paracha, sustainable multi-asset investment specialist at Rathbones, says there is no point trying to create a model to consistently apply metrics to formulate long-term capital return assumptions.
A rigorous environmental, social and governance risk framework should help, however some sectors will clearly be more impacted than others, such as property, transport, agriculture, healthcare and manufacturing.
Paracha adds: “In assessing any company you need to understand the risks of increased government intervention through either regulation or financial incentives – positive and negative.
“Those more vulnerable to external factors such as these will have a higher ESG risk score and therefore you would require a higher return on capital to justify an investment. This needs to be assessed at the micro level, which means you need to do the work. No short-cuts.”
With more asset classes to consider, each of which with its own characteristics and complications, Paracha says it is important that the fund’s objectives and investment process are clear.
As sustainability is a complex area, it requires an expert approach to deep dive into each company’s sustainability credentials, looking at areas such as supply chains and climate reporting.
“Equally, sustainability analysis for multi-asset investing shouldn’t stop at the equities or even the corporate bonds,” Paracha adds.
“The process for more complex asset classes such as government bonds and commoditiesshould also be carefully considered and implemented to ensure all asset classes are aligned with the sustainable objective.
“This can mean that having sufficient diversification and tools to manage risk can at times be a challenge, as some investments are excluded, but we believe that we have enough levers to pull to ensure proper diversification for our sustainable multi-asset portfolios – although sometimes it does require thinking a little outside the box.
