Changing wealth advice climate: every investor’s ESG portfolio is different

The bushfires have pushed climate to the forefront of investors’ choices Picture. Phil Hillyard

The drought that is affecting much of the east coast of Australia and the extreme summer bushfires have given rise to debate about the causes of these catastrophes and their potential link to global warming and climate change.

At the same time, ESG (environment, sustainability and governance) issues have also increasingly been discussion points in the market and media.

The rise of ESG investing reflects a philosophy whereby the investor makes a conscious effort to invest in companies that align with their ethical values.

As a wealth manager, I have noticed an increase in prospective clients coming to me in these first weeks of 2020 asking us to consider ESG “do no harm” issues. These are focused around the environment when constructing portfolios. The level of inquiry has been quite noticeable.

I am fortunate to be able to attend global investment conferences and I have written extensively in these pages on how ESG practices are now well covered at these meetings, particularly in Europe.

In addition, this has ballooned over the past five years, to the extent that I would say it has evolved from a niche proposition into what is now mainstream.

This is reflected in the fact that ESG issues are discussed extensively and included in portfolio construction as a matter of course.

The allocation of capital in both Britain (now that it has left the EU) and Europe has been seen through a broader societal lens.

Earlier this year, while attending a conference in Shanghai, one of my takeaways was not only the extent of talk among the Chinese delegates on ESG issues, but how the theme was being implemented in investment decisions.

When we look at portfolio construction encompassing ESG there are two points that stand out.

Lack of choice: There is a lack of a wide choice in domestic Australian equity ESG mandates in which to invest. Don’t get me wrong, there are some available, but compared with other asset classes and international equities there remains a distinctly narrow range.

Values: There is no “one size fits all” approach since ESG is values-based. It is very dependent on an individual’s values.

There are diverging distinctions as well. Some will want to exclude certain sectors or stocks and others will want to bias towards the sectors and companies that embrace ESG criteria.

How are these distinctions made?

The first are values-based screens that are generally negative, excluding anything from, for example, fossil fuels, gambling, ­armaments, tobacco and sugar.

Conversely, positive screens are those that positively promote their ESG credentials such as responsible hiring and labour practices, the environment, gender diversity, and positive action for change.

There have been more than 2000 studies on ESG investing, yet none of these agree on a uniform way to approach portfolio construction.

Finding the right ESG portfolio to meet the needs of individual investors has been a challenge we have confronted as a firm.

However, witnessing first-hand the experience in Europe, we have had to accept that constructing these portfolios must be around values and therefore each portfolio must be unique.

In constructing a portfolio, it’s necessary to take a granular ­approach. Ours is to present our clients with a traffic light spread­sheet: green being those solutions that meet a client’s values, red being the ones that definitely don’t, while yellow is where we put to the client a potential conflict that may exist and ask them to be the arbiter.

This approach is clear, understandable and it works. The pleasing aspect we are experiencing is that demand is coming from those in the 50s and 60s age bracket.

This is not just a millennial phenomenon. The fund managers we are talking to explain that the leading age bracket for ESG equity portfolio demand is coming from the 60-plus cohort — those wanting ESG principles included in their portfolios.

This makes sense. It’s the baby boomer cohort that has the money to invest today, whereas the millennials are a growing pool of money.

My view is that we are seeing a demand-side trend build. While this trend is not at levels experienced in Europe, the demand is a surprise. It may even change the world in a major and positive way. One reason might be that moral capitalism is about maximising the long-term returns.

Will Hamilton is the managing partner of Hamilton Wealth Partners.

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