Going green is easier than ever when it comes to building a solid portfolio focused on sustainable investments, as the surge in demand is finally being matched by myriad options for the environmentally conscious investor.
John Cotter, professor in finance and the chair in quantitative finance at University College Dublin, notes the “very large increase” in demand for such products, highlighting a recent suggestion by PWC that it is likely to rise still further in the coming year.
Returns on ESG funds, historically poorer than traditional funds, have begun to outstrip non-ESG funds; this has “emboldened” people, Cotter says. “ESG products, by virtue of their popularity, are now cheaper to trade and have as good as if not better returns. It is very easy to invest in these products, whether it is exchange trade funds (ETFs), companies or direct investment or a combination of these,” he adds.
Building a green portfolio is relatively easy and can take a number of forms, Cotter says. “You can invest directly in a renewable-energy company or an electric-vehicle company; institutional investors can buy green bonds; or you can buy sustainability-linked funds, whereby you invest and gain a small part of an offering as part of a diversified fund.” One example is the €500 million green bond issued by ESB last year, the net proceeds of which will be allocated to finance eligible green projects such as wind farms and improving Ireland’s electric-vehicle charging network.
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The growing demand for green investment products is finally being matched by supply, agrees Graham Fox, head of distribution at Amundi Ireland.
“Even five years ago I would have said the saver who wanted to create a well-diversified investment that targeted a sustainable or green investment philosophy might have struggled,” he says. “There was a limited range of funds available to Irish savers and this range was dominated by ethical funds, which are part of the responsible investing universe but a specific segment within this universe. Fast forward to today and savers have a growing range of funds available that target responsible investing.”
This growing range of funds are available across the main asset classes including equities and bonds, while some companies also offer multi-asset fund solutions which deliver a diversified green portfolio across different asset classes in one simple solution for a saver, Fox adds.
Amundi Ireland has just launched the second iteration of its Your Planet Your Future survey, which provides an insight into the Irish population’s attitude towards responsible investing. Despite 97 per cent of Irish people saying they are concerned about the cost of living, environmental and social concerns remain a key interest for savers – more than half of respondents with a financial adviser said they would want to talk to them about responsible investing.
Patrick McLaughlin is socially responsible investment (SRI) multi-asset portfolio manager at Davy. While a diversified investment portfolio is their goal, he notes that this is tailored to the client’s objectives and requirements, with many now seeking SRI solutions.
“As the SRI investment universe has expanded beyond the historic exclusions-focused approach, to incorporate approaches that allocate capital to companies with an improving ESG profile or companies that lead their sector regarding ESG metrics, investors can now confidently invest their core pension assets in a diversified investment solution that is mindful of its impact on the environment and society,” McLaughlin says. Some of these may be less obvious; for example, commercial-property funds offer strong credentials in terms of providing modern and energy-efficient office and retail space.
For an investor with an SRI-focused approach there are a number of options, with “thematic investments” that focus on a particular facet of ESG such as renewable energy, energy storage, health, the circular economy or water management all possible.
“A growing trend we see in this space is thematic funds aligning themselves with the United Nations Sustainable Development Goals, targeting specific goals within their strategies,” McLaughlin points out. ‘Impact investments’ also reside within this space, he notes. “With these, typically investors are seeking a measurable social or environmental impact alongside a financial return. As such, clients may be willing to accept a below-market return.”
Impact investing is generally viewed as a stand-alone, outside of core assets, he adds. “If a client wishes to invest directly in a company operating in the renewable-energy space, for example, this is the appropriate location for this type of investment in their overall asset base.”
Unsurprisingly, creating sustainable investing portfolios is a rigorous process. “As a signatory of the United Nations Principles for Responsible Investment, we ensure that the investment-fund managers selected for inclusion in our sustainable portfolio promise to incorporate ESG factors into their investment decisions and are active investment owners,” says Conal Cremen, investment manager at RBC Brewin Dolphin Ireland.
“When selecting each individual sustainable fund, we focus on funds that are industry leaders in integrating ESG factors into investment decisions and stewardship activities, and funds that invest in companies which contribute positively and measurably to social and/or environmental challenges.”
Cremen explains that clients can choose to apply certain ethical screening criteria to their portfolios, which are then created and managed to reflect these restrictions. “We believe that high-quality companies which manage ESG risks and opportunities well will make attractive long-term investments,” he says. RBC Brewin Dolphin has a dedicated socially responsible investing list for funds with a sustainability focus and with restrictions on investment in harmful activities. “These funds aim to deliver attractive investment returns while contributing positively to global environmental and social challenges,” Cremen says.
Demand for greener portfolios will continue to grow, hen adds. “From environmental pollution and animal welfare to gender equality and human rights, investors are increasingly looking for ways to use their money as a force for good.”