Deirdre Cooper, head of sustainable equity at Ninety One, notes that originally most sustainable strategies were built on top of existing investment processes emphasising exclusions, while the second iteration emphasised ESG scoring methodologies and argued that high scorers would outperform low scorers.
“But neither of these processes were built for alpha generation,” Cooper adds.
“They did not result in portfolios with meaningful differences to the benchmark, given larger-cap companies tend to have higher ESG scores and exclusions that are often focused on less significant sectors in the index.
“However, we believe by analysing non-financial data, incorporating it into the investment case and looking for companies with structural growth drivers driven by sustainability, we can build portfolios that can genuinely perform differently to typical style-driven strategies, and can therefore complement more traditional equity approaches.”
Varying priorities
There is no one-size-fits-all all approach to investing sustainable funds as clients have varying priorities.
According to Matcham, this is one of the challenges with the distribution of sustainable strategies.
He adds: “Some wealth managers/advisers will have underlying clients with very specific sustainability requirements that can be hard to match to mainstream funds.
"Sustainability disclosure requirements will bring a more consistent playing field for sustainable funds in the UK, which is most welcome and will help clients navigate the various different approaches that exist in the market.
“Strong stewardship and engagement, transparency and a clear outline of our methodology/taxonomy are also crucial elements.”
Indeed, the use of sustainable equity funds are likely to grow in popularity helped by the Financial Conduct Authority's SDR rules, to focus on the disclosures and accountability provided to investors.
This, investment experts say, will likely lead to better understanding of sustainability funds, especially in what it is exactly they are trying to achieve.
Quiroz says: “This is important as we continue to move from values-only investing, where there was perhaps an acceptance that returns would be lower, to risk-adjusted returns investing in funds with a proven track record.”
Paris Jordan, head of responsible investing at Charles Stanley, adds: “Hopefully the new SDR labels will improve the credibility of sustainable investing with clients. They provide a standardisation, of both language and expectation, which should be good for our industry.
"There will be teething issues, particularly around articulation to clients, but there are several excellent groups in the market that are helping with this, including many leading MPS providers.
"As with anything new, there will be questions, but over time, labelling should provide clients with a level of reassurance and allow advisers to identify legitimate sustainable products to ensure client sustainable needs and preferences are met.”
Ima Jackson-Obot is deputy features editor at FT Adviser
