Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
…. as climate prompts ESG investor swing to impact
Big investors are increasingly looking to make a difference with their commitments towards a net zero carbon target. They don’t have to raise direct equity capital to do so.
In a recent note to clients, ‘Net Zero: the role of capital markets’, global equities manager Martin Currie says there is a common misconception that without raising new equity capital the ability for secondary markets to create impact in support of net zero is limited.
The note, written by David Sheasby, the head of stewardship and ESG, and John Gilmore, portfolio manager and analyst for Martin Currie’s global equity income strategy, suggests three ways to create such impact.
They are:
- Direct capital to finance and reward businesses which are creating solutions to the climate crisis
- Use active engagement to push for, assess and ultimately price the presence and credibility of net zero, and
- Policy engagement through education and adoption of tools and frameworks to aid the pursuit of climate targets.
With the first of these – directing capital – Martin Currie is reflecting a recent trend for mainstream managers to broaden their active ESG policies into the world of impact investing, which had previously been the domain of private equity managers.
The various impact investing organisations and lobby groups have struggled to differentiate who they represent from broadmarket ESG managers. The most common definitions of impact include a set of principles involving the manager’s intent and ability to quantify results.
Martin Currie’s approach is to “channel clients’ capital towards businesses that are creating solutions”.
Sheasby and Gilmore say: “For instance, to solve challenges such as net zero or to support other sustainable development frameworks such as the UN Sustainable Development Goals. Specifically, we look at how companies can contribute rather than simply align to these goals. In our view they can best do this through the products and services they create rather than simply just aligning through their behaviour… This implies an important distinction when assessing impact.” The three things which impactful investments should show evidence of, they say, are:
1. Intentionality: that the specific intent of the business, product or service is to help solve a challenge, in this case a specific intention to help achieve net zero
2. Materiality: if a significant portion of current or future profits from the investment case is meaningfully associated with solving challenges such as net zero, and
3. Additionality: that the solution created is differentiated and impactful enough to make a significant difference in reaching net zero.
According to Tideline, a US consultancy which specialises in impact investing research and advice, about 60 per cent of the world’s estimated impact investing projects of the past 12 months have been related to climate change. The largest of these have been for the development of new technologies. For investors, this tends to marry the two big thematic trends of renewable energy and technology.
