Responsibility and prudence have always been at the heart of how we do things, because we recognise the responsibility that comes with managing our clients’ assets.

We also recognise that, for many investors, the idea of investing responsibly goes beyond careful risk management, due diligence and diversification.

Increasingly, investors are looking for a ‘holistic’ return, whereby strong financial returns are accompanied with making a positive impact in terms of Environmental, Social or Governance outcomes (ESG).

Indeed, some 49% of respondents to our 2020 Financial Wellbeing Research felt some responsibility to use their wealth to help improve the environment and society.

What is responsible investing?

Responsible Investing is a way for investors to take responsibility for the impact of the companies they invest in, to generate better environmental, governance and social outcomes, and ultimately helping to build a better world.

Our Responsible Investing portfolios are based on ESG principles. ESG describes a set of risks, challenges, issues or themes that relate to Environmental, Social or Governance matters.

For investors, ESG typically refers to the ‘extra-financial’ risks of their investments, such as their carbon footprint, labour standards or leadership structures.

How is Saunderson House approaching this?

‘Buyer beware’ is the mantra core to the way we select investments for our Responsible Investing portfolios. However, as per our longstanding Conventional portfolios, our starting point is the ‘top-down’ asset allocation – the high level blend of cash, bonds, commercial property and equities.

We think this mix is the most important driver of portfolio performance and behaviour over the longer term. Therefore, we adopt the same mix of the four main asset classes in each of our model portfolios regardless of the client’s approach to ESG.

The right mix and model for you is informed by your adviser and determined by your financial circumstances, investment time horizon, attitude to risk and capacity for loss – irrespective of whether you want maximum flexibility with our Conventional approach or greater consideration of ESG risks with our Responsible approach.

With our ‘top-down’ starting point in place, we use a three-pronged framework to build diversified portfolios which avoid contentious industries and are capable of seeing past the prospectus, as follows:

 

So how do you blend Responsible Strategies?

One key difference between our Responsible approach and our longstanding Conventional approach is the way in which we put in place effective diversification. Due to the relative nascence of ESG investing, consensus is still developing around various definitions of what ‘responsible’ investments actually are, from well-governed household names to trailblazing clean energy stocks and social impact bond funds.

 

 

We therefore take a pragmatic approach to diversifying across four Responsible investment styles which we think give clients exposure to a balanced blend of ‘Headline Avoiders’ and ‘Headline Makers’. The former describes well-run, forward looking companies you might well find in Conventional portfolios. The latter describes the more ‘glamourous’ strategies which specifically target positive impacts or leverage a specific ESG risk (for example climate change) in order to build their investment case.

What is Saunderson House’s screening process?

‘Screening’ is perhaps the most recognisable tool in the responsible investor’s toolkit. ‘Negative screening’ describes the exclusion of specific, contentious industries from the universe of potential investments.

‘Positive screening’ is the allocation towards companies which seek to make a positive impact in ESG terms, for example by lending to social initiatives or investing in renewable energy companies. These are typically found in the ‘Thematic’ and ‘Impact’ buckets illustrated above.

Under our Responsible approach, we operate the following negative screen to ensure that clients are not exposed to sectors which may be harmful to the environment or society, which is informed by the UN’s Sustainable Development Goals:

 

 

What does it mean to scrutinise ESG credentials?

The third prong in our framework is the way in which we scrutinise the ESG credentials of funds before recommending them for Responsible portfolios. The rapid growth of interest in this area means it is of utmost importance to get beyond the buzzwords and make sure investors are invested in funds which are responsible in more than just name.

We do so using our own, in-house scoring survey which we put to all funds under consideration for our Responsible portfolios. The survey contains various questions which aim to get to the bottom of how a fund, and indeed its ‘parent’ fund house, views ESG and whether it has the expertise, resource and commitment to back up its badging.

For example, we want to understand whether a fund’s commitment to ESG is matched by the fund house which oversees it. If not, is the fund simply a marketing vehicle? If a fund sells itself as an ESG fund in its prospectus, why might a manager not rule out investing in Oil or Alcohol?

We devote a section of our survey to understanding how funds monitor the non-financial impact of their holdings, and also to challenging the fund on their engagement efforts. We believe that with ownership of companies comes a responsibility to hold them to account on pertinent ESG issues. We examine the voting and engagement efforts of funds to make sure they use their institutional weight and voice to influence positive change in a way that an individual investor cannot.

Funds are given a score determined by their responses to our survey, and only those that meet a given threshold will be eligible for inclusion in our model.

What makes our offering different?

Investments in the Responsible models are subject to the same due diligence and financial analysis as those in our Conventional models. We pull no punches in making sure these investments will be appropriate and serve clients well over the relevant time horizon.

Though Responsible models may behave differently in the shorter-term, we do not believe there is a sacrifice to be made in terms of investment performance over the longer term – as the key ‘top-down’ asset allocation drivers are shared by both approaches. Indeed, we do not expect either our Responsible or Conventional approach to under or outperform the other over the longer term.

We do not believe that the decision to invest through our Responsible approach should come at a premium. There is no difference to the way we charge for advice or management, and our DMS rates are exactly the same.

More information

If you’re interested in responsible investing and would like to find out more about how Saunderson House can help, please get in touch.