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Posted By Henry Gaskin

At SG Wealth we run a couple of variations of our model portfolios which have an “ethical” or “ESG” (Environmental Social and Governance) bias.

Whilst many funds will value ESG criteria when making investment decisions, some funds do so more than others, and our Ethical portfolios are tilted towards these.

We follow a thorough investment process whilst managing our ethical portfolios where we extensively research into the ethical funds universe. We meet with fund managers to understand how their funds are constructed and maintained. We also research and analyse the funds’ investment process, risk positioning and performance, to ensure that they deliver on their objectives and are adding value to clients’ investment portfolios.

We select funds that have a strong track record for investing within an ethical frame and have a positive impact whilst also delivering good performance. Some funds will adopt different methods of ethical screening such as Positive Screening, where managers look for businesses that add positive value and impact on society and the environment (for example, this may be done through investing in clean energy businesses). An alternative approach is Negative Screening where managers exclude companies that do not adhere to the portfolio’s ethical standards (e.g. not investing in arms industries, tobacco, gambling and other more negatively viewed sectors).

An example of one of our fund selections is Liontrust’s UK Ethical fund which is managed by their Sustainable Investment Team. They believe the companies that will survive and thrive are those which improve people’s quality of life, be it through medical, technological or educational advances; drive improvements in the efficiency with which we use increasingly scarce resources; and help to build a more stable, resilient and prosperous economy.

The main characteristics a company must have to qualify are high-quality management, products or services that have a positive contribution to society as well as strong potential for growth which would in return provide leading performance. One of the largest holdings in the fund is Kingspan which is a leader in energy conservation products such as building envelope solutions, environmental management systems and renewable energy solutions. They have also been known for providing efficient ways of cooling and heating business properties. It has delivered an average shareholder return of circa 17% annually over the past decade (source Liontrust, January 2019). Such companies are set to benefit from the rising demand in this area as demand increases for products that are energy efficient reduces emission and thus more economical.

We are keen to make sure that all of our portfolios are diversified across different asset types in order to maintain the appropriate risk characteristics. Historically this has been more difficult in the “Ethical” space, due to the lack of investment opportunities in the non-equity asset types. However, this is changing.

As asset managers are becoming more aware of ESG, we are starting to see these themes play out in many asset classes, even into areas like commercial property. Another example of our fund holdings is the BMO Property fund which produces a regular Responsible Property appraisal for their assets to capture and measure the ESG characteristics on their investments. This would allow them to produce a sustainability profile, distinguishing critical points for their portfolio of properties.
The team consider a range of ESG factors in their investment decisions such as metering strategies, energy performance and carbon intensities, the presence of ‘green lease’ clauses within existing lettings, and potential climate impacts on each property.

Currently the BMO fund procures 100% of its energy from renewable sources for its directly managed properties. Furthermore, the fund has also focussed on its social responsibility in so ensuring that people working within its scope are paid a living wage rather than minimum wage in London and the rest of the UK. In June 2018 the fund was accredited by the Living Wage Foundation as a Living Wage Employer. The fund is the first to achieve such accreditation at the fund level – a level which will arguably see the most positive changes as it impacts those who are traditionally underpaid, such as cleaners and security staff.

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