Luis Levy, CEO of StrategiQ Capital, a trusted investment partner of Carrick Wealth, answers clients’ questions about value-based investment options.
1. Is investing in sustainable funds riskier?
Firstly, sustainability is here to stay. Investors are recognising the importance of sustainable investing and are backing up this conviction with how they allocate their capital. Sustainable funds invest in sustainable companies. These companies generally follow an Environmental, Social and Governance (ESG) framework to create long-term sustainable value and growth. This ESG approach has been proven to reduce market risk, whilst improving profitability. Therefore, investing in sustainable funds actually reduces some risk components while allowing for greater profitability and long term growth.
2. Do you need to choose between having a positive impact and making a decent return?
Quite the contrary, sustainability favours competitively advantaged, financially healthy and less volatile companies. This helps investors reap long term returns. Numerous research reports and studies are pointing to the fact that doing good is not only good for business but also good for investment returns. Both active and passive sustainable equity assets in Europe and the US have outperformed non-ESG counterparts over the past five years, especially over the last year for ESG assets in the US. There also clear diversification benefits in allocating to sustainable investments, improving overall portfolio risk-adjusted returns. Therefore, one does not have to compromise returns when investing in sustainable funds.
3. Is sustainable investing a short-term practice or is it suitable for someone approaching retirement?
Each individual approaching retirement will have his or her own specific set of financial objectives and risk parameters. The approach to allocating to sustainable investments would follow a traditional asset allocation approach whilst ensuring that the overall risk return objectives are met. These include the individuals return objectives, their ability, willingness and tolerance for risk and that the investments are suitably structured and diversified to best meet their long-term objectives. Incorporating sustainable investing as part of the “whole” portfolio approach as opposed to a specific part of the investment strategy we think would be more beneficial. In our view sustainable investing favours long term value and growth creation. Therefore, a longer investment horizon will be rewarded by this approach to investing.
4. How can I tell if investments are actually sustainable?
This is one of the challenges facing investors as there aren’t many standardised measures of compliance. Having said that there are numerous metrics one can use to measure an investment’s level of sustainability. Two popular metrics are the MSCI ESG Rating and the Morningstar Sustainability Rating. These ratings rank funds and stocks based on various ESG components and give the investment an overall score.
5. How would you determine if sustainable investing is right for your client?
Clients are driven towards sustainable investing by a variety of factors – but the notion that it’s the “right thing to do” rings true across all regions. Yet, while values-based drivers are important, they are rarely the sole driver. The increased understanding that sustainable investing can lead to the dual benefit of better risk-adjusted performance compared to traditional portfolios, and mitigated investment risk, has also significantly shifted investors towards sustainability. This approach to investing is becoming the norm these days, and it is envisaged that all companies will one day follow an ESG framework.
6. How could environmental risks potentially affect one’s portfolio?
Environmental risks are becoming an increasing threat to a number of companies. With climate change and “greener” regulations coming into play, companies are being forced to adapt to a more sustainable level of operation. This in turn affects a company’s profitability and therefore an investor’s investment returns. Environmental, social and governance risks are forcing companies to change and therefore companies who are positioned to efficiently mitigate these risks (generally ESG focused companies) will ultimately be rewarded in the long run.