Providing ESG solutions that meet the needs of your clients
The demand for environmental, social and governance (ESG) solutions from investors has grown significantly in recent years. Despite this popularity, it is often difficult for advisers to find suitable products aligned with their clients’ ESG or ethical beliefs. This is changing, as investors seek to have ESG applied across more of the asset classes they are invested in.
How to align ESG values with investing goals
A tailored approach is required to align investments with the values of individuals, as ESG based beliefs are personal - two clients will rarely have the exact same beliefs and investment goals. There is however some commonality with most retail based ESG strategies excluding industries such as tobacco, fossil fuels, alcohol and gambling. Exclusions are the first step in aligning ESG beliefs with suitable investments.
The investment goals of clients interested in ESG strategies are often best considered by ascertaining the ‘shade of green’ a client expects from their investments, and what their risk tolerances are. The more stringent their ESG expectations, the darker green a product would need to be for such a client – assuming they can tolerate the risk levels. For example, a client may ideally want an impact style investment, but is uncomfortable with the relatively unknown risks. Whilst ESG remains important, this investor may have greater comfort investing in an active ESG equity fund which has more familiar risks i.e. tracking error versus a market cap benchmark.
To determine the appropriate ESG solution to meet client’s needs, advisers may want to consider the following when talking with clients:
- What key aspects of ESG are important to them?
- How much risk are they willing to accept?
- Where do they sit on the ESG ‘shade of green’ spectrum?
Answers to these questions will help advisers provide their clients with ESG based solutions aligned with their beliefs, investment, and risk objectives.
These are exactly the processes we go through at Russell Investments when designing a new ESG product, as outlined below:
Click to enlarge
Equity based solutions
The range of ESG based equity products has grown significantly and this competition has helped bring down the costs of investing in this manner. For example, the Russell Investments Australian Responsible Investment ETF (RARI), provides investors with a diversified portfolio of Australian shares that result in a fund with better ESG characteristics than the benchmark (S&P/ASX 200) and a much lower carbon footprint. RARI has a broad set of exclusions which results in tracking error/risk to the benchmark of 3-4%, similar to many active based strategies. The overall design of RARI provides investors with a ‘medium shade of green’ exposure and which we believe makes it suitable for a wide range of ESG minded investors.
RARI might not go far enough for some ‘darker green’ investors, but we believe it strikes the right balance between better ESG characteristics and risk for most clients. In contrast, our low carbon funds offer a different kind of ESG solution as they have a more specific environmental focus, i.e. they focus primarily on the ‘E’. In global shares, we can deliver a much lower carbon footprint than the benchmark, with relatively lower levels of risk versus what we need to in a concentrated market like Australian shares.
For example, the tracking error of the Russell Investments Low Carbon Global Shares Fund is just 0.5% to MSCI ACWI ex Australia. It might therefore be regarded as a ‘lighter shade of green’ than RARI from a risk perspective.
Multi-Asset based ESG solutions
The next evolution in ESG investing is likely to be in multi-asset solutions as ESG metrics are extended to other asset classes outside of equities. Our research analysts discuss ESG with external investment managers across most asset classes, which reflects how important considering ESG risks and opportunities is when reviewing investment options.
Click to enlarge
Source: Russell Investments. For illustrative purposes only.
This year, Russell investments will be launching a multi-asset Sustainable Managed Portfolio. Our Managed Portfolios solution saw significant inflows in 2021 and there is strong interest from advisers for an ESG based version.
We followed the principles outlined earlier on what a good ESG product should look like when designing the portfolio. It will have the following key features:
- Direct Australian equity portfolio with exclusions consistent with RARI
- Active funds from ESG specialists – allocations to Pendal’s Australian shares and Australian Fixed Income Funds, both highly rated by our research team
- Impact style equity investing from Impax Sustainable Leaders Fund, this fund has relatively high tracking error driven by the ‘darker green’ nature of the investment approach
- Better ESG characteristics from active Property and Infrastructure managers.
We are excited to launch an extensively researched solution that will provide investors with a cost-effective Sustainable Managed Portfolio. The portfolio will give ESG minded investors a ‘medium shade of green’ exposure with a mix of passive style and active ESG strategies from a diversified set of external managers across asset classes.
Speak to your Regional Manager for more information about the Russell Investments Sustainable Managed Portfolios.