A market-leading approach to ESG within equity

Article 22 January, 2021

A market-leading approach to ESG within equity

Good ESG is so much more than a box-ticking exercise. A fiduciary manager who integrates ESG into everything they do can really add value, managing risks and driving returns, all whilst supporting positive change.

Written by

Ajeet Manjrekar

Over the past few years, we’ve seen an increased regulatory focus on environmental, social and governance factors (ESG), and a ramp-up in trustee obligations.

Our market-leading approach to ESG within equity was a deciding factor in River and Mercantile winning Fiduciary Manager of the Year at the UK Pensions Award 2020.

Designed from the ground up, not an off-the-shelf product

Many third-party ESG solutions focus on sustainability over returns and underperform the market net of fees.

This was not the outcome we wanted for our clients. We developed an equity solution which allows us to integrate our full ESG philosophy at no additional cost to our clients.

By not tying ourselves to off-the-shelf products our clients avoid the following pitfalls:

A focus only on sustainable companies which doesn’t consider how this affects returns
Only identifying companies who score well on an ESG basis today, not those that are improving which can often be the best performers over a longer time horizon
A one-size-fits-all approach, which doesn’t account for structural differences between sectors and regions
High investment management costs relative to traditional index
Through partnering with a third-party manager, we developed an equity solution which addresses these shortcomings. The result is an approach which allows us to:
Express our asset allocation views in term of sectors, regions, markets caps and styles
Incorporate our ESG views for global and emerging markets, accounting for structural regional and sector differences
Improve trading and operational efficiency reducing costs.

We have managed to achieve all this for an ‘all-in’ single basis point fee, including both management and fund expenses. Our clients now have a market-leading ESG focused equity solution for a fraction of the cost of many other solutions in the market.

“We strongly believe behaviour around ESG factors must continually improve. ”

Our equity ESG screen in practice

We integrate our ESG philosophy into our investment process in a way which reflects our desire for behavioural change, but not at the cost of economic returns.

Everything we do starts with our macro views, whether it be our views on countries, sectors, or other factors. That’s because ultimately we believe that macro drives market returns. We always establish top-down macro views first, then screen for superior companies within those macro themes.

We evaluate each company within their peer group and their geography. Market cap and style are also considered.

With the exception of carbon risk where we exclude the worst offenders, we screen for excellent or improving companies rather than excluding entire industries or activities. By supporting the better, more transformational, companies within each industry we seek to reward change from within.

We strongly believe behaviour around ESG factors must continually improve. This means that companies who aren’t ESG market leaders yet, but show a willingness to improve, and are already making progress, will be considered.

By doing this, we seek to reduce the cost of capital for both already strong, and weak but improving companies, affecting positive behavioural change.

Equity portfolio outcome

Our equity screening process has translated into a portfolio that supports positive change, with a strong ESG rating and superior climate risk characteristics.

Source: R&M Fiduciary Equity comprises all active and passive equity funds. ESG rating and data comes from MSCI ESG Research as at 30th September 2020. MSCI ACWI Index used as Global Equity Benchmark. ”Our equity portfolio” refers to a model portfolio developed by R&M and the added value shown is based on simulated performance. R&M has provided these model portfolios to a third party manager for implementation in their fund. Simulated performance is not an indication of future performance and must not be relied upon. The value of investments and the income from them can fall as well as rise and you may not get back the full amount originally invested.

To hear more about our award-winning fiduciary management ESG equity solution, please get in touch.

This article constitutes a financial promotion and has been issued and approved by River and Mercantile Solutions, a division of River and Mercantile Investments Limited which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is a subsidiary of River and Mercantile Group Plc (registered in England and Wales No. 04035248).

Please note that this communication is directed at, and intended for, the consideration of Professional clients. Retail clients must not place any reliance upon the contents.

The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments.

Registered office: 30 Coleman Street, London, EC2R 5AL

Registered in England and Wales No. 3359127

FCA Registration No. 195028

Fiduciary Management

As experienced fiduciary managers committed to investment excellence, we make the difficult decisions on your behalf, with the aim of:

Delivering superior risk management, giving you greater flexibility and control to target the return you need.
Providing innovative strategy construction, giving you a straightforward way to manage your portfolio.
Helping you reach your desired investment outcome, thanks to our breadth of expertise.

Find out more