An advisor’s clients were struggling to find investment options that met both their factor and ESG criteria.
We combined the investors’ desired factor exposures with their ESG criteria in a customized way.
The resulting portfolios met the dual mandate, and the clients gained greater clarity on what’s actually in their portfolios.
Given the popularity of—and market for—factor investing, it’s common for many advisors to combine it with other things their clients express interest in, such as responsible investing. However, for those clients who want to dovetail their environmental or social principles with factor exposure, advisors’ choices typically narrow to a few select funds with predetermined ESG criteria.
In this instance two clients were invested in the same factor-based fund with a sustainability overlay. The fund’s ESG criteria either excluded or underweighted companies with “significant” amounts of carbon emissions. It also included some social considerations, such as tobacco revenue.
For the first client, however, “significant” was too ambiguous—the client sought a more defined threshold. The second client wasn’t particularly interested in defining the emissions threshold and didn’t care to restrict companies with any sort of tobacco revenue. Moreover, the second client wanted the same factor-based exposure in international developed markets, whereas the current fund was strictly a US-based universe. The advisor was unsure what to recommend to these two clients but knew that the current fund was clearly unacceptable to both, albeit for different reasons.
Leveraging our factor and responsible investing expertise, we put together a customized yet simple and straightforward approach the advisor could use for each client. The first client selected a similar factor-based exposure to the original fund and applied tobacco criteria. We then used our ESG data to find a suitable screen that satisfied the client’s need for a more specific carbon-emissions threshold. We explained the screen, the threshold, and the rationale behind the two to the advisor, who was able to give the client clarity and confidence in the resulting portfolio.
We helped the advisor meet the second client’s goals by broadening the exposure to include all developed markets, not just US markets, using the same factors and the same carbon-emissions screen applied to the first client’s portfolio. However, in the second client’s case, we introduced no other criteria, helping the advisor satisfy the client’s desire to not restrict companies that derive any level of revenue from tobacco.
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A single factor-based fund, despite its sustainability overlay, didn’t meet the investing needs for two clients with responsible investing goals. Both clients were better served by moving to a more flexible structure in which they could define sustainability in their own way. What’s more, the advisor gained a simple and scalable way to satisfy multiple clients’ objectives—even when each client wanted something different.
Parametric can provide clients with a wide range of responsible investing expertise across a host of themes—from faith based to environmental and from social to governance. We welcome the opportunity to help advisors and their clients define what responsible investing means to them and integrate it into just about any exposures they seek.