ESG and the post-pandemic world

Everyone is currently focused on the adverse economic effects of social distancing but the implications for the environment as a result of COVID-19 are far from negative. Indeed, much has been written about how wildlife is flourishing, the air is becoming cleaner (I can’t remember the last time I saw a plane fly over my house in London) and the earth in general appears to be getting time to heal.

However, even before the pandemic hit, many people were already turning their sights to how they could help make the world a better place through their investments.

Back in 2016, we recognised there was demand for portfolios that fulfilled a ‘responsible investing’ ethos whilst still delivering the same risk-controlled outcomes. This culminated in the launch of our Ethical Emphasis portfolios at the beginning of 2017.

NMA podcast

The work we’ve been doing around environmental, social and governance (ESG) investing resulted in one of our investment team, Oliver Jones, being approached to deliver a podcast for Citywire’s New Model Adviser.

It’s a subject Oli knows well: he has been awarded a certificate in ESG investing by the CFA society, has done a number of  teach-ins on the subject for his PortfolioMetrix colleagues and is writing a new guide on Responsible Investing for our adviser partners (and their clients) that will be published shortly.

One of the discussion points in the podcast is the subject of passive vs active investment. At PortfolioMetrix, the funds we select focus on positive screening and engagement: using an active research function to determine the social and environmental effects of potential investments.

We do have a passive option of our ethical emphasis portfolios, although passive ‘ethical’ investment vehicles tend to be limited to negative screening and so are ‘lighter green’ than their actively managed counterparts – something that Oli covers in the podcast.

If you have a few minutes, I highly recommend you take a listen, particularly as Oli also addresses some of the other key aspects that advisers need to consider when speaking to clients about their ethical preferences.

Half of advisers unaware of ESG client requirements

On the subject of client preferences, a new survey highlights that half of advisers are unaware of their regulatory requirements regarding ESG.

These requirements were introduced by the FCA in January 2020 (and come into force in 2021) and it means advisers must ask clients about their views on responsible investing.

Some advisers may find this new requirement daunting, not least because individual investors may have different interpretations about what is positive or negative from a societal point of view. Trying to structure a cost effective and diversified multi-asset approach that will suit every single socially conscious investor or exclude every security that could be considered problematic is not for the faint hearted.

However, the use of technology can throw advisers a lifeline, giving them the flexibility to customise portfolios. This is the PortfolioMetrix approach: enabling portfolios that focus on companies widely considered to have positive social attributes and, where applicable, to screen out those considered troubling, with the expectation that this will be appropriate for the majority of socially conscious investors.

As the world starts to gather its thoughts about how life can return to some sort of normality, I think it’s fair to say the impact of this virus will go much further than healthcare and economics – it’s making us all re-evaluate the very air that we breathe.