How to think about embedding ESG in investment strategies

Michael Eakins, chief investment officer at Phoenix Group and Adam Ruddle, senior investment officer at LV= explore the strategies available to organisations that want to embrace ESG investing

clearpat POSTED ON 9/7/2020 4:08:26 PM


For investors who are thinking about ESG – what sort of strategies should they be considering?

Michael Eakins: That’s a great question because it’s all well and good understanding the various regulatory requirements and requirements of policyholders and shareholders, but actually how do you embed those requirements and objectives into the investment decision making process?

Really the best-in-class way to do that is to really come at it from two angles. One is to have a top-down approach - so as a corporate we have our ESG principles, our requirements and our objectives which we articulate and report on, on a frequent basis alongside our financial results.

"I think the way in which you embed that ESG framework is a combination of the bottom up and the top-down"

The second approach is bottom up – so doing bottom up analysis within each of the investment portfolios really ascertaining from a bottom up perspective if the investment choices that we’re making either by asset class or by individual assets or exposure to companies or sectors is appropriate.

I think the way in which you embed that ESG framework is a combination of the bottom up and the top-down and the third overlay I’d say there is really making it a key part of the incentive framework for the investment professionals.

So, making it very clear to the portfolio managers that are going out and originating assets that it’s not sufficient for them to originate assets in isolation and that have the right economic characteristics, but that you also need to have hard ESG objectives.

"You also need to have hard ESG objectives"

You very often hear about soft ESG objectives but making sure that the people who are actually originating and managing the assets have those hard ESG objectives which overlays the top-down and the bottom up approach.

Adam Ruddle: The strategies will depend on the risk appetites and expectations of your customers - so, your end-investors. And that’s going to be really important as you try to embed ESG in your portfolio. So where are they and where are you as a firm on the ESG spectrum.

You might be willing to sacrifice investment returns for some real ESG impact or you want to keep the same expected level of return but you want an ESG flavour, or perhaps something in between where ESG is integrated and thematically applied to your portfolios.

"Strategies will depend on the risk appetites and expectations of your customers"

Personally, I think there’s probably two main strategies to consider. Firstly, perhaps a side allocation to a specific ESG fund, so you’ve kept the bulk of your asset allocation how it is, but you’ve allocated a small amount to ESG funds. The second strategy is to integrate everything, your entire strategic asset allocation to an ESG framework. And of course there will be something in between, some sort of hybrid.


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