Sustainable investment portfolios: building blocks for success

By Michael Greenberg
Senior Vice President, Portfolio Manager
Franklin Templeton Investment Solutions

In 1987, the United Nations World Commission on Environment and Development proposed a definition of a bold new concept: sustainable development.[1].

“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet theirs.”

It took a few decades to catch on, but as the world’s attention shifts more to society’s environmental, social and governance (ESG) goals, investing in sustainability has become mainstream. .

Canadian investors want ESG investment options

A 2021 research study sponsored by Franklin Templeton found that ESG is of fundamental importance to Canadian investors[2]. In this study, 61% of respondents said it was important that their investment options include ESG integration. Among participants in defined contribution plans, the percentage was even higher; 68% wanted integrated ESG options to be available when making investment decisions. Our findings provide an opportunity for plan sponsors, consultants and financial advisors to engage with their clients, including newer ones, on these issues.

The financial sector responds to growing demand

Sustainable investing has become a significant business opportunity for the financial sector. Global sustainable fund assets reached $2.74 trillion at the end of December 2021, according to Morningstar. sustainable investment. The number of sustainable funds is five times higher than ten years ago[3].

Additionally, sustainable investing has transformed beyond traditional SRI funds to now include diverse ESG strategies and philosophies across a wider range of objectives and constraints. Different sustainable investing styles prioritize different outcomes, as depicted in the accompanying illustration.

Different Types of ESG Investing, Then and Now

Addressing Challenges and Dispelling Myths

ESG investing is a burgeoning field fraught with pitfalls, including a lack of industry standardization around rating methodologies and difficulties in manager selection and portfolio construction, among others.

Although the challenges associated with ESG investing are many, we believe they can be overcome through sophisticated processes and tools. Proprietary ESG ratings that incorporate an in-depth review of industry materiality are a step in this direction when investing in securities. A thorough and continuous examination of the underlying managers can identify the creme de la creme and weed out those whose processes may not yet be up to snuff. But without a refined portfolio construction methodology and the tools to implement it, a strategy can stray from its objective and unintended exposures can multiply.

In a recently published article, we discussed the rise of sustainable investing, key considerations and barriers to effectively integrating sustainable analytics into portfolio construction, and the approach we take to multi-asset portfolios focused on Sustainable development.

Integrating sustainability into multi-asset portfolios

Effective management of an ESG-oriented portfolio requires a high level of investment in data, technology and human resources. To implement a strong sustainable investing process, investors should focus on these areas:

  • Complement rating agency scores with an in-depth, personalized ESG rating analysis that takes materiality into account
  • Implement a robust investment manager search process to ensure that underlying funds create real ESG value, and
  • Have sophisticated tools to facilitate the portfolio construction process to execute client goals and reduce unintended biases that may arise.

ESG investing is a complicated and resource-intensive endeavor. Partnering with an asset manager with the experience and expertise to build effective ESG portfolios can be helpful in unlocking value. We believe this could enable clients to effectively capture a risk-adjusted return advantage for portfolios resulting from a sustainable investment orientation.

We believe that in the long term, sustainable investing will continue to grow in importance. Investors will reward companies that act as good corporate citizens and penalize those that don’t. As investors, we need to consider important sustainability factors to properly assess value over time.

We believe this will lead to better risk-adjusted returns over the long term.


[1] United Nations World Commission on Environment and Development, “Report of the World Commission on Environment and Development: Our Common Future”. 1987. Chapter 2, paragraph 1.

[2] The Xcelerant survey was conducted online with a sample of 1,236 Canadian investors aged 18 or older and was administered between October 28 and November 2, 2021 by Directions Research, which is not affiliated with Franklin Templeton . Data were statistically weighted by age, gender and geographic region in Canada. The custom-designed weighting program assigns a weighting factor to the data based on current Statistics Canada population statistics.

[3] Sustainable Funds US Landscape Report – 2021: Another year of broken records. (2022). Morning Star, p. 1


IMPORTANT LEGAL INFORMATION

The material is intended to be of general interest only and should not be construed as investment advice, a recommendation or a solicitation to buy, sell, hold securities or adopt any investment strategy . It does not constitute legal or tax advice.

The opinions expressed are those of the author and the comments, opinions and analyzes are given as of March 31, 2022 and are subject to change without notice. The information provided herein is not intended to constitute a complete analysis of all material facts regarding any country, region or market. All investments involve risk, including possible loss of capital.

Data from third party sources may have been used in the preparation of this document and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no responsibility for any loss arising from reliance on this information and reliance on comments, opinions and analyzes in the material is at the sole discretion of the user.

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Franklin Templeton Investment Solutions (FTIS) is a global team dedicated to global portfolio solutions, drawing on the expertise of a number of Franklin Templeton affiliates. In Canada, the advisor for the FTIS Canadian mandates is the Fiduciary Trust Company of Canada.