Please tell us about the global groundswell to ESG.
Let’s step away from ESG investing as a topic and ignore the warm, fuzzy feeling one gets from “doing the right thing”. For some perspective, it is proposed that a new epoch in geological time is created called the Anthropocene, meaning a period where changes to the earth’s climate, geological processes, biodiversity and species extinction are primarily driven through activities of humans. This impact will ultimately, if unchecked, have a devastating, interconnected impact on human society. Civilisation as we know it today is significantly more fragile than our current response to global challenges suggest.
If we consider sustainability through the lens of how much one earth can provide, we are currently consuming 1.5 earths, meaning we are not heading into enemy territory, but are already far behind enemy lines. We have no time left to dither in our response. What you are seeing with the ESG groundswell is simply a rapid catch-up on the realisation that market forces have failed to factor in the “external costs” of our industrialised society. We need to be far more assertively pro-active in our response and, as allocators of capital and overseers of governance, investors can be a powerful force for change.
What is PortfolioMetrix’s investment proposition?
PortfolioMetrix (PMX) is a specialist investment manager that builds portfolios around needs, not wealth. We question the suitability of one-size-fits-all solutions and believe the best client outcome requires the investment management process to be closely aligned with the adviser’s process, using well-constructed, precision engineered portfolios. Our investment proposition is driven by the understanding that the return path matters and so we focus strongly on a risk-based approach that emphasises portfolio efficiency.
Brendan, please give an overview of the PortfolioMetrix BCI Sustainable World Equity Fund of Funds due to be launched in South Africa.
The fund is designed for clients who wish to generate a positive social and environmental impact alongside financial returns. It is a South African Collective Investment Scheme that invests in global equity markets by selecting underlying managers that specialise in sustainable equity investing.
What is the fund’s strategy, investment philosophy and process?
The fund follows the same investment philosophy and process as all portfolios at PMX. This starts with asset allocation and then fund selection and portfolio construction. However, this strategy only selects underlying funds that embrace sustainability and positive change. This means underlying funds only invest in companies delivering a clear, positive benefit to society and the environment through their products, services and business practices. This typically leads to funds that adopt a multi-thematic approach, often aligned to the UN’s Sustainable Development Goals.
Do ESG influences offer investors long-term performance advantages when factored into portfolio construction?
There is a lot of evidence that individual companies benefit from having a higher ESG rating. Numerous studies have found a higher ESG rating was strongly correlated with a lower cost of capital (the company could raise both debt and equity on easier terms) as well as outperformance in a business sense (higher accounting profits). However, this is not the same as saying that ESG strategies tend to or will outperform over long periods at a portfolio level. This holds more mixed results. What we do know is that, typically, thematic approaches will have biases to certain sectors and may exclude or have very little of other sectors. This will produce variability of returns relative to the broader market.
Please tell us about the fund managers selected for the fund.
We have populated the fund with underlying managers that specialise in sustainability and impact investing within either developed/emerging markets, listed infrastructure or property. The fund managers have gone through a rigorous due diligence process carried out by us and in our view have a superior investment product within this space. Each fund manager has a unique philosophy and process and will implement their strategy differently. This diversity in implementation creates a product that we believe is uniquely attractive.
Why does PortfolioMetrix prefer active funds as opposed to passive funds for its sustainable funds?
We believe that sustainable investing is an active management process and the use of passive funds, while cheaper, is less impactful.
This is because applying a comprehensive and truly impactful solution requires an in-depth knowledge of a company’s products, services and business operations to understand how the company impacts society and the environment. This process is qualitative as the data provided by companies is never comprehensive and often difficult to interpret. Unfortunately, passive funds are reliant on this data and therefore are not able to implement the strategy effectively in our view.
PortfolioMetrix Asset Management SA (Pty) Ltd is an Authorised Financial Services Provider.
