Green guidance: Strategies for selecting and advising on sustainable products
In this article, I provide wealth managers a step-by-step guide on selecting and advising on sustainable products. This guidance is structured into four chronological steps for easy implementation.
 | Guido Bolliger, CIO & CEO, Asteria Investment Managers |
Step 1: Does the client want sustainable products?
The goal of product suppliers is to meet client needs effectively. It's crucial to first determine if a client values the non-financial aspects of their investments. Only those who gain additional satisfaction from sustainable investment solutions should be offered such products. Previously, some investment managers inaccurately promoted sustainable investments by claiming potential outperformance to win over skeptical clients, leading to disappointment. Current research indicates no solid evidence that sustainable investments consistently outperform traditional ones. However, it also suggests that incorporating sustainability does not negatively impact long-term risk-adjusted returns.
Step 2: Map the client’s long-term performance objectives to her sustainability needs
Given the variety of products labeled as sustainable, this task is likely the most challenging in the process. The table below provides a non-exhaustive list of sustainable products with a focus on products that have environmental KPIs. We distinguish between two types of portfolios:
- Core: Portfolios with lower active risk. As such, their historical and future risk-adjusted performance is highly correlated with similar portfolios that do not integrate ESG. They can be used as building blocks in the client’s asset allocation.
- Satellite: Portfolios with higher active risk that are generally more concentrated than core portfolios. Their historical and future risk-adjusted performance can significantly deviate from the market’s performance.
I did not include stewardship and engagement as these practices can be implemented on top of the strategies described below. I also restrict the list of strategies to those investing in listed assets.
Portfolio type | Strategy | Description | Indicators |
Core | Normative exclusions | Exclude specific industries (e.g. weapons, tobacco) or companies (e.g. UN Global Compact violators[1]). | Sector allocation constraints with respect to the unconstrainted index. Percentage of UNGC violators in the portfolio compared to the unconstrained index. |
ESG | Over-weight companies with good ESG credentials whilst controlling active risk. | ESG score with respect to the unconstrained index.
| |
Decarbonisation | Carbon footprint reduction over time. | Carbon footprint in line with established targets. Allocation constraints for high-emitting sectors. | |
Decarbonisation | Align the portfolio with a low carbon trajectory (e.g. Paris-aligned trajectory). | Reduction of carbon footprint compared to the parent index. %YoY portfolio self-decarbonisation. Other indicators related to constraints (exclusions, green/brown ratio, etc.). | |
Transition | Over-weight companies with credible activity-level energy transition plans and align the portfolio with a low carbon trajectory.
Green bond portfolios. | Reduction of carbon footprint. % Companies with credible transition plans. Environmental impact of the bonds’ use of proceeds (e.g. avoided tons of Co2e emissions). | |
Satellite | Solution providers / Impact | Invest exclusively in companies whose products and services contribute to accelerate the environmental transition. | % EU Taxonomy alignment[2]. % alignment to SDGs 6, 7, 9, and 11[3]. Environmental impact of the products and services (e.g. avoided cubic meters of water usage). |
SDG contribution / Thematic | Invest exclusively in companies who provide solutions to fill specific environmental goals (e.g. renewable energy).
| % alignment to the specific SDG.
|
Step 3: Select the right product for a given strategy
Beside traditional factors (e.g. costs, skills, etc.), three additional factors need to be considered when selecting sustainable products:
- Diversification is essential, especially in satellite strategies, which often have a limited investment scope. I strongly recommend avoiding products that are too concentrated (less than 50 positions) and that align on very few specific impact targets (e.g. thematic ETFs). There are diversification gains from being exposed to a higher number of companies and several impact themes.
- Transparency: The product must have very clear sustainable objectives (e.g. reduce carbon emission by 7% per year compared to MSCI World) and report indicators for these KPIs.
- Sustainability should be deeply embedded within the investment process, not merely an add-on to traditional methods. Sustainable objectives should define the investment universe and be integrated into portfolio construction and performance monitoring, alongside risk and return assessments.
Step 4: Monitoring the performance of sustainable products
It is crucial to clarify potential performance deviations of sustainable products compared to traditional markets before clients invest. Core sustainable products generally align closely in risk, market capitalization exposure, and sector allocation with their non-sustainable equivalents. Comparing their performance with both traditional and sustainable benchmarks is advisable. Satellite products, however, carry a higher risk of performance deviations due to sector, size, and style biases, making their short-term performance incomparable with traditional benchmarks. For these, peer groups or thematic composite benchmarks are more appropriate.
Biography
Guido has more than 25 years of experience in managing and developing systematic investment strategies. He joined from SYZ AM, where he held multiple roles as Chief Investment Architect and Head of Quantitative Strategies. Prior to that, Guido served as CEO of the Olympia Capital Alternative Investment Fund.
Guido is the CEO and Chief Investment Officer of Asteria Investment Managers, and is one of the members of the Executive Committee.
[2] ec.europa.eu/sustainable-finance-taxonomy/
[3] SDG 6 : Clean water and sanitation, SDG 7: Affordable and clean energy, SDG 9: Industry, innovation, and infrastructures, SDG 11: Sustainable cities and communities