I have long known what I wanted to do with my pension. It would go into sustainable funds with a high-risk rating, given I have 30 years before I can access the money.
But within a couple of minutes of looking at what was available, I was drowning in percentage figures showing performance, charges and holdings. This was before even considering the impact reports, which are supposed to illustrate how a fund has performed on non-financial metrics such as carbon emissions.
Any layperson would be overwhelmed. David Macdonald (pictured above), founding director of climate-focused advice firm The Path Financial agrees. He says building a green investment portfolio is overly complicated: ‘It is hard enough to put together a portfolio based on performance metrics alone. If you start to fold in the ESG data and try to figure out where the edges are in a world where definitions are fuzzy, it gets really hard.’
But he has found an off-the-shelf solution. The Path outsources its portfolios to Tribe Impact Capital and EQ Investors.
‘There are leading experts in this field, so why wouldn’t we leverage their expertise?’
Depending on their risk profile, The Path’s clients tend to have a blend of portfolios from the two providers.
‘Tribe and EQ Investors were pretty much the only two firms running model portfolios that came across my radar when we were setting up the company in 2019,’ says Macdonald.
There are now more options out there, meaning The Path must keep its choices under review. Even so, Tribe and EQ Investors, which Macdonald describes as ‘thought leaders’, are still out in front.
‘They offer leading expertise with good financial results as well as good impact reporting,’ he says.
Tribe’s Sustainable Impact Model Portfolio Service (Simps) devotes more than half its monthly factsheet to explaining the impact of its investments. Environmental issues are an obvious place to start.
‘We can look at the CO2 emissions of a portfolio and compare that to where the client might be with their existing investments, and even map it to degrees of climate change in reference to the Intergovernmental Panel on Climate Change’s 1.5°C target,’ Macdonald says.
Model portfolio service (MPS) providers can help by showing impact alongside financial returns. The most recent factsheet for the medium-risk Simps shows the portfolio returned 16.8% over the year to 31 July 2021, and that holdings generated 142 tonnes of CO2 per $1m sales compared to 179 tonnes in the MSCI ACWI benchmark. This translates to 4.6 tonnes of CO2 saved per £100,000 invested for a year, which is equivalent to the carbon emitted by six flights from London to New York.
Other impact metrics are tricker to establish, although there are frameworks that help.
‘Measurement tools are somewhat thin on the ground at the moment, but you can map a portfolio broadly to the UN’s Sustainable Development Goals [SDGs],’ Macdonald says.
Tribe’s Simps factsheets break down impact allocation under four themes guided by the SDGs. The biggest allocation is 44% to the enterprise and infrastructure theme, which focuses on SDGs including clean water and sanitation, affordable and clean energy, and decent work and economic growth.
Further detail about the activities of the underlying companies is also provided. Out of the 438 companies held in the equity portion of the medium-risk portfolio, 118 report on renewable energy generation. These businesses generated 696.6 million megawatt hours (MWh) of renewable energy over the last reporting year. The average UK semi-detached house uses about 3.8MWh a year, according to energy provider OVO.
Appealing to a wider audience through sustainable investments is a key part of The Path’s mission statement. It was recently declared one of the five winners of the Sky Zero Footprint Fund competition for companies tackling the climate crisis, scooping a £250,000 share of the £2m prize in advertising support. It is now in contention for a £1m grand prize.
Funds with impact mission statements set out real-world goals beyond returns, making it easier to discuss investing, while many of the holdings are fast becoming household names.
‘What clients like is that some of the funds are really easy to understand, like Baillie Gifford Positive Change,’ MacDonald says.
The £2.8bn Positive Change fund is managed by Citywire AAA-rated team Kate Fox, Lee Qian, Michelle O’Keefe and Ed Whitten, and is held by both EQ Investors and Tribe. Tesla, one of the most popular and well-known companies in the sustainable equity space, is among its top 10 holdings.
‘Tesla was a game changer. It has really moved the ESG agenda years ahead,’ Macdonald says.
‘Capital going into a business like that and supporting it has moved the world away from fossil fuels. It makes the conversation very accessible because people understand it.’
Investors were rewarded for putting money into Tesla early. The electric car manufacturer’s strong share performance in 2020 has been well documented. It led to a stellar year for Baillie Gifford Positive Change, which returned 717.4%. According to Morningstar, Tesla contributed 26.9% of the fund’s performance.
This is not to say Macdonald is a full-on Elon Musk disciple. He says Tesla is ‘no stranger to controversy’ and notes governance concerns at the company.
‘The G in ESG is potentially a worry for some investors. That performance has been stratospheric, and you wonder whether that valuation is sustainable,’ he says.
If a client has concerns about a particular holding within a fund in their portfolio, the off-the-shelf nature of MPS can pose a problem, Macdonald says. Individual concerns or preferences will have to be addressed with the discretionary fund manager.
But if a client wants their ethical values reflected in their portfolios, EQ Investors and Tribe will adjust all investments to be tilted accordingly.
Macdonald believes the market will offer more nuanced solutions for clients investing ethically as more advisers turn to impact funds.
‘Impact investing is still a relatively new concept. More thematic tilts will emerge over time as customer demand feeds through into the market and the fund management industry realises it has to deliver more granular and thematic offerings.’
Tribe’s portfolios contain a good example of how demand for impact has created new funds. Joint top fixed income holding Wellington Global Impact Bond fund, managed by Citywire + rated Campe Goodman, was launched in 2019 in response to investors’ desire for more sustainable fixed income opportunities.
The £163.1m fund, which is also held by EQ Investors, allocates towards themes. The biggest single theme at 22.1% (multi-theme allocation makes up 27% of the portfolio) is affordable housing, something that chimes with The Path’s clients.
‘If you have a housing association that is able to go to the market to raise money to help house-vulnerable people, it is a much more emotive and purposeful conversation than saying: “Such and such company is raising some money on the markets and the coupon on the debt is x%.” That is a less engaging conversation and a lot less impactful.’
While ESG investing might not be for everyone – and an off-the-shelf solution might not work for every client who wants to have an impact – talking to clients about it can create more engaged investors. As Morningstar recently highlighted to Citywire New Model Adviser, clients will increasingly expect a degree of personalisation when it comes to their portfolios – after all, they can get it everywhere else.
Considering impact investments is a good way for advisers to get ahead of that curve, so no wonder The Path has done so well in the race for a marketing prize.