Talking Tactics

How sustainable is your core?

Incorporating environmental, social and governance (ESG) issues into investment portfolios is quickly moving away from a nice-to-have to a must-have.
April 2021

Simon Holmes

Director, Portfolio Manager, Multi Asset Solutions

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Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management.

 

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Incorporating environmental, social and governance (ESG) issues into investment portfolios is quickly moving away from a nice-to-have to a must-have. What has driven this shift in recent years and can, and should, this also be part of your core allocation?

A huge shift towards sustainable investments

There has been a growing public awareness of the collective impact that our individual actions can have on others. Broadcasters such as David Attenborough and campaigners like Greta Thunberg have brought environmental problems to the fore, while the Covid-19 pandemic has highlighted health and social issues.

International treaties aiming to manage environmental damage have been part of the backdrop since the 1980s, with the Paris Climate Agreement currently the most prominent. More recently, governments are seeing opportunities to align fiscal stimulus with an environmental agenda, which will result in opportunities for investors, while regulators are driving change through the introduction of sustainability-related considerations explicitly within investment terminology and when working with clients. Finally, strong relative performance has pushed sustainability-orientated funds on to the radar of the general investor as well as those with a focus on ESG issues.

There are challenges ahead…

Looking forward, regulatory change is driving advisers to integrate sustainability-related considerations into their entire investment process, including the assessment of client suitability, building an appropriate investment solution, and subsequent client reporting. This amounts to a significant re-engineering of their current work practices.

The move to ‘sustainable’ brings with it a tsunami of new terminology and considerable scope for misunderstanding on behalf of their clients. Advisers will need a clear understanding of the range of investment approaches to support their clients in building an investment proposition. We believe that product providers have a big role to play.

Building an investment solution that represents good value for clients remains a challenge, particularly one that includes active asset allocation and stock selection, diversification and risk management, while being clear on the risk target and all at a reasonable cost.

…but also opportunities

Across the investment industry, there has been, at times, too large a focus on short-term results of underlying companies, at the expense of longer-term objectives. Increasingly, we see a recognition by investors that attractive returns can be found through allocating to companies that are well governed, with a sensible, long-term strategy that considers all stakeholders – this will also align well with a sustainable investment framework. Identifying such companies that are also well placed to benefit from the large and growing public investment in thematic areas, such as combating climate change through efficiency and clean energy, offers a significant and long-term investment opportunity.

The move to embed sustainability into the investment process allows opportunities for those advisers who are already comfortable and competent in building and advising on sustainable portfolios to take on new business. The additional layer of sustainability/ESG-related reporting also offers scope to advisers to further build and demonstrate their core investment knowledge, which could enhance their credibility in the eyes of clients.

To find out more about how BMO Global Asset Management can help you offer good value sustainable core investments to your clients, please contact the BMO sales support team.

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

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