Before starting the assessment of the sustainability level of your investment portfolio, it is key to define your objectives when investing in sustainable portfolios.
Reputation is generally mentioned i.e. not financing sectors or companies which might affect the reputation of the investments and in the medium term, their performance. The portfolio can therefore be screened based on respect of international standards or on the severity level of controversies the companies in portfolio may be confronted with.
There are plenty of objectives from different angles, as it is also the case in terms of approaches.
For example, a good starting point is to review whether the portfolio respects some minimum requirements via a normative screening, and notably by assessing compliance with the United Nations’ Global Compact principles. Most Sustainable portfolios fully comply with these principles, so being invested in non-compliant companies will quickly tarnish the Sustainability credentials of your strategy.
A second way to look at your portfolio is to verify whether it applies exclusions of controversial activities (such as Armament, Gambling, Adult-entertainment, Tobacco, etc.) and/or of countries (e.g. dictatorships). Besides, it makes sense verifying whether the managing company has an Active ownership policy, meaning that it supports Sustainability principles through voting in the general assemblies of the company it is invested in, and through engaging with the management of those companies.
Going beyond, you can review whether there are hard constraints on the portfolio in terms of ESG scores .Such so called Best-In-Class / Best-In-Universe filters prevent the portfolio managers from investing in companies with lower ESG scores, and may benefit the ESG quality of the portfolio. Indeed, external experts assess the sustainability profiles of issuers and grant these an ESG score. Conversely, some strategies do not set any hard rule about the way they take ESG risks and opportunities into account, but integrate it in their fundamental analysis. Such approach is called ESG integration, and is generally less ambitious from a Sustainability perspective.
For all these approaches, a good way to measure how Sustainable your portfolio is, is to compare its performance with a reference universe . This gives you an idea whether your Sustainability screening actually helped improving the ESG quality of your portfolio, in comparison with its reference universe or benchmark index. Yet, for some other types of portfolio, a comparison with a benchmark is not possible.
Sustainable thematic strategies are specifically built around Sustainable themes (typically some Greentechs, Food & farming, Social or Health-related topics) through stock picking, and they are only invested in companies which are positioned to benefit from these topics. For such thematic strategies, you will need to look at the actual business-lines of the companies in the portfolio (i.e. at what do they produce / provide). At last, Impact investing strategies take stakes in companies, organizations and funds with the explicit aim of generating a positive social and/or environmental impact on top of the financial return. This impact is measured through ESG Key Performance Indicators (KPIs). Those ESG KPIs give you an idea of the Sustainable impact of your portfolio.
These approaches show that a wide variety of Sustainable strategies is possible, starting from exclusions and going all the way to pure Sustainable Impact strategies. Even combining different strategies is an option. Whatever you define as your objectives, we do recommend you to make your assessment from all the relevant different angles to make sure that you assess the whole picture of your portfolio.
