As the investment industry increasingly embraces environmental, social and governance (ESG) principles, financial advisers Foster Denovo hopes this will eventually become the default approach for most investors. 
Foster Denovo launched a new Sustainable Dynamic Portfolios (SDPs) earlier this month, following growing demand for more socially and environmentally conscious investments. They are a “natural progression” of the firm’s Dynamic Portfolios (DPs) and Clearview platform, which launched last year.
The new range has been created in partnership with Worthstone, an ESG (environmental, social and governance) fund research specialist. The sustainability models will be invested on a discretionary basis and maintain a focus on the investor’s own financial path and risk profile, with each portfolio geared to a different level of risk.
But there are some differences in the new sustainable portfolio range and Foster Denovo’s existing offering.
First, the new portfolio range will have no passive investment element.
Secondly – and more obviously - the sustainability agenda means the portfolios will take into consideration “clear sustainable and ESG criteria” along with making returns.
The portfolios will have a dedicated investment committee, which will focus on reviewing their sustainability elements. This will be a sub-committee to the firm’s general investment committee team.
“The new range of sustainable portfolios has been designed to address the growing needs of socially conscious investors wanting investment choices that do more than provide them with a rate of return,” Foster Denovo said.
“Whilst seeking options that will help their assets grow, managing the risks to this growth from environmental, social and governance (ESG) factors is becoming more of a priority.”
Declan McAndrew, head of investment research at Foster Denovo, said the firm has had aspirations to build out its model portfolio service to include sustainability for some time.
But it has taken the time to get the sustainable profile right because it had to formalise what its definitions and ideas about sustainability were. McAndrew (pictured) said it was important to get this element right, rather than rush out the models just to capitalise on the current strong interest in sustainability.
“We thought we had to educate ourselves first before we present that to clients. Because unless you have a foundation of your beliefs and then you put that within a client brochure, it’s very difficult to articulate that out to your clients. But I think that we’ve got the right balance between making sure we’ve got things started without looking for perfection,” he said.
“Because actually we could’ve launched it quite a few month ago and that would’ve been the wrong thing to do without all the foundations in place.”
When determined with its sustainability definitions, Foster Denovo used a “spectrum of capital”.
This ranged from only focusing on financial returns to total philanthropy at the other end. The SDPs would fall between the two, focusing on more progressive and solution-driven sustainable agendas without sacrificing investors’ returns for any positive impact.
The SDPs will also cater for the type of sustainability impact investors want to achieve along with any other requirements.
“Within the sustainable range we need to make sure that client specific things are catered for as well,” McAndrew said. “If people do still want a particular impact, we will have those as our satellite option as well.”
The momentum behind sustainable and ESG investing has been building alongside increased social and environmental awareness for some time. But 2020 has seen this trend accelerate even further due to the Covid-19 pandemic shining a light on these issues.
Sustainable investing has moved being a niche area of the market to becoming an in-demand strategy in 2020.
The latest edition of the Calastone Fund Flows Index (FFI) found that equity funds with an ESG mandate saw £588m inflows in September. In contrast, equity funds without an ESG focus had outflows of £203m.
Constructing a sustainable portfolio comes with its own challenges, different from building a ‘standard’ portfolio, according to Foster Denovo. These include fewer funds to choose from, a lack of lengthy track records and the risk of ‘greenwashing’.
“You’ve obviously got a smaller pool of ‘runners and riders’ and some of them have a shorter history as well,” McAndrew said.
“Also, some of the fund management groups might have been repurposing or rebadging their existing funds as now sustainable. So there are probably more challenges than there are in just the standard active portfolio.”
But one of the main challenges to constructing a sustainable portfolio is “trying to destroy some of the myths” around this style of investing.
Convincing advisers that this isn’t just a product for millennials and Generation X investors was part of the battle, McAndrew said, along with dispelling the idea that investing for a social or environmental positive impact means giving up returns.
Ultimately, Foster Denovo wants to be able to drop the sustainable name from the portfolios in the future.
“Because it will be so mainstream, it will just be what most fund managers do and we can judge them on that basis,” McAndrew said. “That’s a little way in the future but actually getting coverage where they’re talked about not just as an add-on to have, but this is the primary offering to our clients.”