Investment Strategy:  Fourth Quarter 2022 – Positive Impact Portfolios – Assessing their real impact

Positive Impact Portfolios – Assessing their real impact

Positive Impact Portfolios – Three Years On

Driving through France during the summer, past the parched fields where even sunflowers had conceded defeat to the sun and lack of rain with their slumped, dishevelled heads and leaves crisped and brown, we listened to the radio and could just about translate  (with my nothing-to-write-home-about GCSE French and a much more impressive A-level grade from Mrs T) a story about the plight of the local farmers. In brief, we managed to gather the call for better water efficiency and hardier, drought-resistant variants as some of the primary needs to tackle the climate-issues. 2022, like 1976, may turn out to be a memorably extreme year in isolation but it stands within a long-term trend of rising global temperatures. 

We launched a range of Positive Impact Portfolios in April 2019 with the intention of extending our range of investment options across our core, passive and offshore model portfolios. At the time, we wrote:

“We know that a lot of our clients want to support a more sustainable future, making better use of scarce resources and tackling issues such as climate change, the environment and improved quality of life. We also appreciate that we need to produce the investment returns our clients require to meet their long-term financial objectives. We think that the funds we have chosen and the portfolios we have constructed will meet both these criteria.

We have constructed three portfolios, which have the same risk/reward characteristics as our traditional Quadrant portfolios. 

Quadrant Positive Impact Portfolio Conservative

Quadrant Positive Impact Portfolio Balanced

Quadrant Positive Impact Portfolio Growth 

All the funds we have selected have tailored their investment approach to incorporate either:

  • A relatively straightforward ‘ethical’ screen to typically filter, amongst others, the ‘bad stuff’ like tobacco, arms and the big polluters.
  • A more nuanced use of an ‘ESG’ framework (Environmental, Social & corporate Governance) to not only filter the bad stuff, but to constructively engage companies to deliver positive societal and environment change).
  • A more encompassing ‘Sustainable’, ‘Socially Aware’ or ‘Positive Impact’ approach to its current, where investments are made in firms that are actively engaging in a business that deliver a positive benefit to society or provide solutions to environmental and social challenges.”

In explaining the ambition of the portfolios, we’ve often described their intention is to ‘deliver less harm to environment and do more good to society’. We happily stand by this but also happily recognise this is not overly tangible or measurable in terms of how their ESG criteria stand versus our core portfolios. To try and overcome this, we have not only invested in additional research software but have also taken advantage of capitalising on some of the resources from one of the very largest asset management firms there is (we are restricted on saying who I’m afraid). Part of the project was to try and identify how much of an uplift our Positive Impact Portfolios had over their equivalent core portfolio and I’m pleased to report the following.

The portfolios that were assessed were:

  • Core Conservative (Con) and Positive Impact Conservative (PIP Con)
  • Core Balanced (Bal) and Positive Impact Balanced (PIP Bal)
  • Core Growth (Gro) and Positive Impact Growth (PIP Gro)
  • Aggressive (Agg) – which does not have a PIP equivalent.

Overall MSCI Rating – Deep Dive

The MSCI ESG Quality score assesses key environmental, social and governance risks and opportunities. The scores range from 0-10 (with 10 being the best) and what we can see is that our core portfolios pleasingly already deliver a high level of ESG quality with a high level of the portfolios being successfully analysed (typically between 80 and 85% of the portfolio). 

To set some context, MSCI assign ratings depending on the overall quality score given to a portfolio. There are seven ratings in total, the highest being AAA, the middle rating BBB, and the lowest rating CCC. 

It is pleasing to see that all our portfolios, at the time of assessment sat within the second highest rating of AA, with the positive impact portfolios each incredibly close to the top rating of AAA. The average client portfolio that had been assessed using the same system and process during the whole of 2020 sat within the 5.7-7.1 range, which equated to an A rating. 

Carbon Footprint 

Impacting the environment using fossil fuels is perhaps one of the areas most investors would expect there to be a significant improvement on, given energy and mining companies can easily be avoided. Assessing the carbon intensity takes that a little further by trying to quantify how many emissions are not only directly produced by the company, but also incorporating how many emissions are caused by the generation of electricity purchased by the company.  

It is pleasing to see a significant reduction in carbon emissions within our Positive Impact Portfolios versus their Core equivalents, ranging from between 33% and 50% depending on the model. 

Alignment to the Paris Agreement

The Paris Agreement came into effect in 2016 and is the legally binding treaty which seeks to limit global warming to well below 2, preferably to 1.5 degrees Celsius. The analysis conducted essentially calculates the impact to global warming taking place by 2100, assuming the whole world economy matched the same carbon budget as one of our portfolios.  It is, of course, a stretch too far to imagine that this will actually happen, but it is a way of reaffirming that the Positive Impact Portfolios deliver an enhancement to our Core range. In our discussions with the team that independently analysed the portfolios (and who see portfolios from multiple wealth managers), they highlighted it was not common to see portfolios that met with the 1.5 degree Celsius world.

We will continue to learn, develop and evolve our understanding on all matters ESG and incorporate this understanding into our Positive Impact Portfolios. Through time, the propositions the asset management community bring to market will continue to evolve and we will seek to continuously improve and move forward the Positive Impact Portfolios to not only ‘deliver less harm to the environment and do more good to society’ but deliver the investment returns you seek too.

Please note that the Quadrant portfolios were independently analysed in June 2022 and all figures relate to the portfolios on that date. The degree of ESG uplift will change over time depending on fund selection and asset allocation.

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