Industry insider says there is a clear, new focus on environmental and social issues
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Asset managers must guard against pushing their own ethics and morals on to clients when formulating ESG-conscious portfolios.
Vis Nayar, deputy CIO, Global Equity Research, said that his biggest lesson in recent years is that preferences differ from person to person and that the emphasis must be on a skilled money manager’s ability to deliver customized, effective solutions.
He said: “We’re a large organization and we’ve done the work to build the technology around portfolio construction and also the integration of the carbon numbers, for example, to make sure we can deliver the objectives of the client.
“These are difficult challenges because while the data is materially improved from where it was years ago, individual providers still have different answers to similar topics. The challenge of integration is very difficult because you have to constantly make sure the client understands what it is they are looking for to make sure we can deliver exactly that and not something that reflects a different set of view.”
Environmental, social and governance have, argued Nayar, long been integrated into investment decisions, although he said there is a clear renewed focus on the ‘E’ and ‘S’. He added that where there is a valuation-based opportunity there will always be controversy, whether it be around profitability or, just as likely, on an ESG issue.
He said that HSBC is a rational investor and, regardless of the client’s ethics, examines the risk and dynamic of every stock. But rather than a hurdle to overcome in meetings with clients, he believes that discussing the impact of including or excluding a company on ESG grounds is actually an effective away to build relationships with clients.
“We [can] have specific exclusions around beliefs,” he said. “We are easily able to adopt our portfolios around that and when we communicate performance and understand and talk about that, that’s part of the conversation with our client.
“So if you exclude tobacco, that’s going to have an impact in terms of the outcome. It’s very important to talk about it. I actually think that’s a very good way of investing with clients and it develops better relationships because you have strong and very open conversation upfront about what it is a client is trying to achieve. And that means the subsequent discussions are much more colourful and more interesting.”
Nayar said HSBC is more of an advocate of inclusion rather than exclusion and believes in trying to engage companies to do better in their sector and give the market the ability to reward good behaviour.
For example, if you have a big oil company with a big carbon footprint that has 5-10% of its business around renewable, to get them thinking about the future and where the company is growing is really important.
He said: “If we think about the investment generally and say if you’re going to manage risk, the biggest challenge around carbon and everything around climate change is there is a policy change needed at some point to help the capital markets and actually redirect flow.
“We don’t know the timing for that so if you actually do a strong impactful portfolio today, you could be waiting some time before those things get through the capital market. Whereas if you build diversified portfolios, you take a very controlled amount of risk and that manages that timing risk in a much more controlled fashion.”
