Sustainable investments move into mainstream

To respond to increasing investor demand, fuelled by greater awareness and heightened social consciousness, private banks are increasingly offering sustainable investing options to their clients.

RBC Wealth Management will soon be enhancing its sustainable fund range, reveals George King, head of portfolio strategy, by adding a third-party sustainable manager to its open architecture platform, and a water fund.

Also, the bank will identify which of the funds it already offers integrate environmental, social and governance (ESG) considerations in their investment process.

Sustainability as a theme has evolved dramatically over the past decade, as have the methods of implementation within a portfolio, says Mr King. In the fund management industry it has moved away from negative screening or exclusion strategies towards a more holistic way of looking at risk. This means integrating additional risk factor evaluations into the mainstream investment approach, such those around a company’s labour policy, or its impact on the environment.

There is clearly “historical baggage” to deal with, he says. Often sustainable funds are confused with ethical, ‘green’ or SRI products that, limiting the investment universe, lower potential investment returns and/or have higher volatility.

There is a misperception around sustainable investing when it comes to risk adjusted returns, according to Mirjam Staub-Bisang, founder of Independent Capital Management. But many research results have shown that this approach does not necessarily lead to lower returns. On the contrary, a recent study from Harvard Business School showed that sustainable companies, with a strong focus on ESG governance issues, outperformed companies without such a focus by almost 50 per cent over the observed period from 1992 to 2011.

In addition to training private bankers, it is essential to provide them with “persuasive investment products” which generate a superior performance potential for clients. Advisers should be able to share the social benefits of this approach with their clients but “sustainable investing best gets sold via performance,” states Ms Staub-Bisang. “Investors get wary when performance and financial return are mixed with emotional return, ‘feeling good’ instead of making money. Many private clients will then rather opt to donate money and try to maximise return with their investments.” 

RBC’s Mr King explains that the “educational process” aims to give private bankers the tools to conduct that “nuanced conversation” to be able to understand where clients are in the spectrum between wanting to make money ‘at all costs’ and wanting ‘to do good’ through philanthropy – with SRI, ESG or impact investing the intermediate approaches – and then find solutions. The enhanced sustainable offering should help the bank attract new clients, says Mr King, and the next generation is going to have the sustainable concept “high up on the agenda”.