Dedicated responsible investment strategies offer an opportunity to have a greater positive impact. We construct responsible portfolios by using a methodology to select companies with an aggregate environmental, social and governance (ESG) rating above, or equal to, AA as measured by Morgan Stanley Capital International (MSCI). AA classification means – a company leading its industry in managing the most significant ESG risks and opportunities. We are also beginning to introduce impact funds in some portfolios where appropriate. For example, the Pictet Global Environmental Opportunities impact fund invests in companies which focus on creating resource efficiency or improving environmental quality.
Balance and performance
When creating a responsible portfolio, there are natural concerns that negative screening of certain sectors will lead to reduced diversification. Currently, there are challenges in finding alternative asset classes (hedge funds, commodities, etc.) that score highly from an ESG perspective. However, this is a fast-moving space and we will soon see such investments become available. We run a lot of analysis that satisfies us that the exclusions in place do not lead to underperformance.
Screening out some high-income sectors, such as tobacco, can result in too much of a portfolio being invested in a small number of sectors, ultimately impacting income. However, responsible portfolios can be structured to create a target income for clients and there is evidence that such portfolios may perform better in the long term. Due to the rising
demand for responsible products and services, as well as government support, companies that embrace responsible practices can benefit from favourable taxation, reduced borrowing costs, and potentially lower risk. Also risks to investors might be reduced when reviewing sound ESG practices with an overlay of MSCI controversies and avoiding companies that have harmful governance practices, or have negative social events that may impact the stock price. As a result we look at positive selection and promotion of ethical stewardship.
Next steps
Responsible investing is an ever-evolving practice and we are now analysing the carbon impact and ESG score of our portfolios. We believe that demand for responsible portfolios will only increase in coming years.
Actively embedding aspects of responsibility throughout our business is a fundamental part of Kleinwort Hambros’ long-term strategy. As a leading responsible bank in client services and expertise we encourage and support our employees to do their part. For example, in 2020 our employees donated 7,732 CSR (Corporate Social Responsibility) hours and we directly supported almost 1,000 Individuals and Community Organisations/Charities.
We have set the bar high in saying we want to be recognised for leadership across all aspects of responsibility, including how we support our clients, manage our investments, business and our staff.
Delyth Richards
For further information contact Jeremy Hill, Kleinwort Hambros Newbury Office.
In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document.
jeremy.hill@kleinworthambros.com 020 7597 3445
kleinworthambros.com 31
finance
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