There is a growing interest among clients in the concept of green and socially responsible investment. This has led to an increase in money managed under responsible investment strategies of 25% between 2014-16 according to the 2016 Global Sustainable Investment Review.
As individuals we can all express our views around sustainability via the ballot box; as investors we can express our preferences through participation in the global capital markets.
The main issue is how this can be done without compromising the desired investment outcomes. How can portfolios reduce their investments carbon footprint, ensure investments are not being made into companies associated with undesirable issues like arms tobacco child labour etc and still have a diversified portfolio proving the desired long-term returns?
There is a challenge in achieving the dual goal of sustainability and social consideration are met while building investment solutions aimed at growing wealth for the future.
For clients who request this type of investment, Carpenter Rees often incorporate a sustainable fund from Dimensional Fund Advisers into their portfolio’s. The Dimensional solution to sustainable investment is to first focus on concentrating on the sources that generate high returns for clients while minimising costs. This is a philosophy that sits across all our model portfolios.
From this base, Dimensional then evaluate companies on a broad array of sustainability measures (such as carbon emissions, land use, toxic waste and water management). That means looking at companies across the whole portfolio and within individual sectors and ensuring that the worst offenders, based on a low sustainability score, are removed altogether. Those that are left are over weighted or under weighted based on how well their score ranks on a set of key sustainability criteria. This process ensures that diversification can be maintained while encouraging good behaviour.
The outcome from research shows that this enables a dramatic reduction in investment into Companies not addressing carbon emissions whilst maintaining diversification and ensuring the focus remains on the drivers of investment return.
In the socially responsible area of factory farming, cluster munitions, tobacco, and child labour there are clearer factors which excludes them. Companies deriving a significant proportion of their income from these areas or from gambling tobacco, or any of the other non-socially sustainable activities can be excluded altogether.
The two functions of return and sustainability need not be incompatible concepts. There is a systematic process to ensure diversification and targeting the sources of higher expected investment returns to ensure a green and pleasant investment portfolio.
Warning: The above information is provided for information only. It does not constitute investment advice, recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.