Increasing numbers of people are asking how they can incorporate their views on environmental, social and governance (ESG) issues into their long-term wealth goals in a way that doesn’t compromise sound investment principles.
Global asset management firm Dimensional Fund Advisors has responded by launching in Australia and New Zealand a Global Sustainability Trust that combines a systematic approach to sustainability with the firm’s core equity methodology.
“Investors often have to choose between effectively targeting environmental and social concerns on the one hand, and a robust investment solution on the other,” says Dimensional Australia’s chief executive officer Glenn Crane. “This strategy does both.”
The Global Sustainability Trust screens companies both at a portfolio and an industry level, underweighting firms which rank poorly on sustainability metrics and overweighting those with more sustainable practices.
The outcome is a dramatically reduced carbon footprint that effectively balances diversification, client preferences around sustainability and the pursuit of higher expected returns. The eligible universe of the strategy is close to 1500 large cap securities in 22 developed countries outside Australia.
Dimensional’s systematic methodology contrasts with the more prevalent binary approach where firms are judged as “in or out” based on their record, a screening practice which consultant Willis Towers Watson recently criticised as overly simplistic (see note 1).
Dimensional also employs social screens to exclude or reduce exposure to companies that are connected to or that derive revenue from practices such as tobacco, gambling, alcohol, child labour, cluster munitions, pornography and factory farming.
The third element alongside the environmental and social filtering is governance, the “G” in the ESG. Essentially, this means making sure company managements have the right incentives to maximise shareholder wealth and are doing the best possible job in managing those businesses and not diverting income for their own use.
Dimensional combines this systematic ESG approach with its core equity methodology, which is a broadly diversified strategy emphasising securities with higher expected returns – firms with smaller market capitalisation, lower-relative prices and higher profitability.
Investments that take into account ESG concerns represented nearly $600 billion of assets under management last year, according to the 2015 annual benchmark report of the Responsible Investment Association of Australasia (RIAA) (see note 2).
But while individuals and institutions clamour for solutions that align their environmental views and personal values with their investment decisions, success in one endeavour can often be at the expense of success in the other.
“We’re building solutions that take account of clients’ environmental and social preferences, while staying highly diversified, targeting the long-term drivers of return and implementing efficiently,” Crane said. “It’s the same disciplined approach we apply in every other strategy.”
Founded in the US in 1981 and in Australia since 1994, Dimensional is known for its scientific approach to investment, taking rigorous, evidence-based academic research and applying it in portfolios that take account of real-world frictions.
The firm manages about $500 billion in total globally. Of that, it manages about $35 billion in portfolios that encompass social or environmental considerations, strategies it first began developing from the mid-1990s.
Notes
1.“Don’t Get ESG? – Global Investment Matters, Willis Towers Watson, May 6, 2016
2. Responsible Investment Benchmark Report 2015, RIAA
