At Moneyfarm, we’re always looking for ways to better align our portfolios with the attitudes of our customers. It’s the reason we suggest a risk level to each individual investor and rebalance our portfolios where necessary to ensure they remain fit for purpose. It’s also the reason we talk to our investors daily to hear their insight into our products.
One thing we’ve increasingly been discussing with our clients is the introduction of a solution built with sustainability and social responsibility at its core. So, after taking the time to build portfolios we know our investors will love, we’re ready to launch Moneyfarm’s new Socially Responsible Investing.
The fundamental tenets of ESG investing are fairly straightforward. These are a focus on environmental sustainability, awareness of social issues, and sound governance.
Getting socially responsible investing right takes time. It’s not as simple as, for example, excluding polluting industries or companies of questionable morality – these are a part of the process, but ensuring that the investments themselves are effective while maintaining sound ESG principles is a complex balancing act.
In this article, we’ll explain how we put together our Socially Responsible Investing portfolios and what makes them up, as well as explaining how the Moneyfarm Engagement Layer separates our ESG offering from the rest.
How we build our ESG portfolios
With Moneyfarm’s standard portfolios, ESG considerations are applied ex-post. What this means is that we build our portfolios before we comb them for social laggards. In our new Socially Responsible Investing portfolios, the process is ESG-focused from the ground up.
When we build our socially responsible portfolios, we use only best-in-class ETFs that actively optimise for ESG risk, CO2 intensity, and any controversies that might affect a business’ social impact. We select funds that score highly on ESG factors, as well as those that consider the investor’s role as owner and creditor.
We also apply negative screening alongside the best-in-class approach, to provide another layer of protection against companies that engage in controversial practices or that, frankly, our investors would not want to be associated with. As you can imagine, some key areas we avoid are the arms trade and gambling, to name just a couple.
For more information on how we build our ESG portfolios, take a look at our Socially Responsible Investing page, which covers everything from structure to impact.
What makes up the portfolios
Let’s take a look at what actually goes into one of our Socially Responsible Investing portfolios. The first thing to note is that, just as with our regular investment portfolios, our ESG range will have seven different risk levels, each tailored to suit a particular kind of investor with a particular attitude to risk.
As you can see from the chart below, the greater the risk level of a portfolio, the more it will be made up of equities. At the other end of the spectrum, less risky portfolios tend to be made up more heavily of bonds, with all risk levels holding a small amount of cash. This is very similar in structure to our regular portfolios.
Geographically, the differences between risk levels are less stark. As you can see from the chart below, United Kingdom assets hold less weight as the risk levels increase, while exposure in the US and emerging markets (excluding China) grows. Chinese assets range from none in our lowest risk portfolio to slightly more prominent in higher risk portfolios.
The chart below details the changes in currency exposure as the risk levels of the portfolios increase. Put simply, as the risk level increases, exposure to GBP is reduced while exposure to USD, emerging markets, Euros, Japanese Yen and others increases. This is due both to the fact that higher risk levels can afford higher levels of volatility, and because for higher levels of risk, currencies like USD and Yen can work as a safe haven in volatile periods.
Measuring the impact of the portfolios
Anyone investing in a Socially Responsible portfolio will undoubtedly want their money to make a difference. There are perfectly legitimate financial reasons for opting to invest in ESG, but we expect the majority will be guided (at least in part) by a desire to align their wealth with their beliefs.
It’s important, then, that we are able to measure the impact of the portfolios across a few different metrics. Below are arguably the key details – our ESG portfolios invest in companies that are less CO2 intensive (42% reduction on average) than the non-ESG ones.
Importantly, our Socially Responsible Investing portfolios are 100% United Nations Global Compact compliant. This is an initiative that encourages businesses to behave responsibly, covering a broad range of social and environmental factors from working conditions to climate responsibility.
Finally, our portfolios will only use funds that are 100% compliant with international labour laws. This covers everything from unfair discriminatory practices to the absolute avoidance of forced labour. This is something every portfolio will take into account, but it’s vital that an ESG proposition is hypervigilant in these kinds of areas.
In terms of fundamentals, this means there are a few notable metrics we can highlight. The overall MSCI ESG Risk Rating level of our portfolios increases significantly, and all portfolios have a rating between A and AAA. The number of ESG laggards (companies highly exposed to ESG risks) decreases significantly. The Weighted Average Carbon Intensity is significantly reduced, while the fund sustainable impact involvement increases by up to 50% more (12% to 18%).
The Moneyfarm Engagement Layer
A core feature that separates our ESG proposition from others is the Moneyfarm Engagement Layer. Put simply, this is a set of principles that guide our approach to socially responsible investing, key pillars we want the funds and businesses we invest in to align with. These are:
- How ETF issuers vote
- Asset manager engagement on environmental topics
- Alignment of the fund to the Paris Agreement’s goals
- Asset Manager policies and structure for proxy voting and engagement
- Pledges signed
What this means is that we are not simply interested in the assets that make up any given fund. It’s also extremely relevant how those asset managers behave and how involved they are in environmental issues. It also places the funds themselves within the wider context of the Paris Agreement and international sustainability targets.
The Moneyfarm Engagement Layer will not only inform our decision-making process broadly, but will be specifically called upon in instances where two funds appear similar on other metrics. When all previous conditions are met equally, preferential selection applies to ETFs that have a higher Engagement score. This framework also allows us to maintain continuous engagement with ETF issuers, which can ultimately result in influencing their activism with investee companies.
A note on performance
When people open a Socially Responsible Investing portfolio, a large part of the decision will be driven by a desire to protect and grow their wealth over time. This is, after all, the primary reason anyone invests and it’s important that ESG propositions can, at the very least, keep pace with regular investment portfolios.
The chart above is a simulation, a backtested performance projection to give us an idea how our new Socially Responsible Investing portfolios would have performed across five and a half years. Much like our regular portfolios, valuations took a hit at the beginning of the Covid-19 crisis, while generally rising over the period.
Of course, past performance is no indication of future returns and investors should be prepared for their portfolios to dip in value as well as grow. However, it is becoming increasingly clear that socially responsible portfolios have the potential to perform alongside regular ones. We recently produced a deeper dive into the potential performance of ESG portfolios and the factors that make the difference, which you can read here.
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