No - Eleonore Bedel
Considering the environmental and societal challenges we are facing, more and more clients wish to give meaning to their investments by helping create a more responsible and inclusive economy. Particularly among entrepreneurs, we have seen a real shift in the way they perceive responsible investments. Today, 60 per cent believe they can combine responsible investment with performance, up from 30 per cent before the pandemic, according to BNP Paribas Wealth Management’s 2020 Entrepreneur and Family Report.
Banks, including our own, started to develop diversified sustainable investment (SI) offerings to meet clients’ positive impact expectations more than 15 years ago. However, making responsible investments the default investment solution, i.e. systematically offering clients only sustainable investments unless they explicitly opt out, is not yet possible.
Indeed, our first responsibility as wealth managers is to adapt to what clients expect. The prerequisite for offering our clients SI by default is to have an offer broad enough to cover all their needs, in terms of financial performance, risk and so on.
Wealth managers are moving in this direction but we believe the market is not yet mature enough in most countries, particularly in certain asset classes. Belgium is one exception, but it is difficult to implement an SI by default strategy in other markets. We therefore favour a combination of different asset classes to diversify clients’ portfolios and offer them the best service according to their financial profile and impact expectations.
In order to advise them on their asset allocation based on their personal beliefs, we developed myImpact, a digital tool built on the UN’s 17 Sustainable Development Goals, to understand the impact clients want to achieve.
In addition, banks are implementing a more selective definition of sustainable investments, with stricter criteria. This methodology allows us to rate our entire recommended universe, in all asset classes. Higher-rated financial instruments can be integrated in a sustainable portfolio. Proposing sustainable investments by default to our clients today would force us to lower these quality standards to widen the range of products available, a strategy we do not want to adopt.
Private banks must work closely with asset managers in building or improving funds, to transition towards more sustainable investments. We must work even with asset managers whose asset classes are not very mature when it comes to integrating sustainability, for instance hedge funds. Nonetheless we see progress on all fronts.
The upcoming European Sustainable Finance Regulations will accelerate the integration of sustainability within the majority of investment products. This will be a key structural step in making sustainable investments mainstream. It will bring us one step closer to making SI the default investment
Yes - James Purcell
Over the past decade, sustainable investing has been transformed. From a niche activity focused on values and what an investor was not allowed to do, it has become a vibrant mix of return-seeking strategies that showcases what can be done to improve outcomes for people and planet. Morningstar data shows that sustainable investment funds generate consistent inflows and across asset classes – frequently outpacing their conventional peers.
To demonstrate that the industry is ready for sustainability as a default within multi-asset portfolios, we need to look at asset allocation across all asset classes.
For 70 years, multilateral development banks, such as the World Bank, have offered a viable alternative to high-grade developed market debt: AAA credit-rated with a 0.99 correlation spread to US Treasuries and a typical credit spread of 10 basis points. Now with in excess of $400bn of outstanding publicly traded debt, investors can mimic the maturity and duration of US dollar and euro sovereign curves.
A decade ago, the green bond market – where bond proceeds are ringfenced solely for sustainable purposes – was struggling for relevance with around $10bn in annual issuance, according to Bloomberg. Today it’s a booming $600bn market. Aided by a further $200bn of sustainability-linked bonds, there are ample securities to construct portfolios to a variety of credit and sector compositions.
Like their investment grade cousins, the emerging market green bond market has been growing rapidly, triggered by the catalytic 2017 partnership between the World Bank’s International Finance Corporation and asset manager Amundi. The latter has since launched a liquid version of the EM strategy, which has gathered $500m of assets in just two years.
Across the equity spectrum, sustainability is no longer a one-size-fits all-strategy. Managers can deploy the well-established approach of sustainability leaders, acquiring a quality factor tilt in the process. These can be combined with sustainable thematic funds that look for the sustainable products and services of tomorrow. Equity portfolios can be rounded off with improvement and engagement strategies that seek to catalyse sustainability and financial improvements in target companies, delivering uncorrelated sources of return.
The financial results of the well-established approach of sustainability leaders have been impressive. The popular MSCI World Socially Responsible Investment Index has beaten its conventional peer for six consecutive calendar years.
Even gold is now investible in a sustainable manner. Infinitely recyclable with no degradation of quality, gold is ready-made for the circular economy. With recycled gold generating just 5 per cent of the carbon emissions of its mined equivalent while simultaneously accounting for 25 per cent of annual gold supply – whether jewellery or consumer electronics – recycled gold can form part of a multi-asset portfolio. In 2022, the UK’s Royal Mint – which oversees a $500m exchange traded commodity – announced it would back at least 50 per cent of their investment product with recycled gold.
In conclusion, we are now at a point where it is possible to not only have sustainability as a default within a multi-asset portfolio, but that portfolio can also generate compelling risk-adjusted returns – and be at the forefront of financial product innovation.
