Perspective

Incorporating ESG into multi-asset strategies


How to take a thematic approach in ESG investing?

Disruptive forces have accelerated secular transformation, which brings thematic investments to the fore. Themes are long-term in nature, and a wide range of factors – from macro policy and valuations, to style and sentiment – can create variations in short-term performance.

Taking climate change investing for example, it is definitely not a one size fits all exercise. It is a broad scope that covers an array of sub themes ranging from decarbonisation, electric vehicles, zero-emission aircrafts to energy alternatives. This is why a diversified approach with active, dynamic asset allocation is warranted for a smoother path of returns from sustainable investing point of views. 

How does Schroders incorporate ESG considerations into multi-assets?

Crucially, sustainability incorporation is a function of specific investment objectives, level of integration and relevant themes. At Schroders, multi-asset investing’s goal is to marry the objectives of diversification and long-term risk-adjusted returns against the backdrop of sustainability, to deliver our insights to our clients over market cycles.

It is key to note that not all the assets are sustainable by nature, which reduces the eligible sustainable investment universe. However, the benefits from the resultant are still fairly compelling.

Our own proprietary tools such as the CONTEXT framework and SustainEx help us understand implications for risk premia across asset classes and flag sustainability risks too. It provides our Multi-Asset Team with flexible tools to monitor and measure the sustainability degree of our portfolios, while permitting other assets that are useful for diversification, tactical asset allocation and risk reduction.

What to watch out for in building ESG portfolios?

Let me illustrate this with a few MSCI indices as examples. In the table, you can see that the MSCI USA ESG Leaders index underperformed MSCI USA index which in turn underperformed MSCI USA Climate Change index over the 5-year period to June 2021. This highlights that inconsistencies exist in performance measurement and proves that there are nuances that investors need to consider.

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Ultimately, multi-asset strategies offer something a single asset class cannot achieve. It is essential to apply tactical thinking based on short-term performance and volatility to benefit from the widest possible opportunity set, while also benefitting society and the environment over the long run, to reach ultimate sustainable investing goals.

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