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3 Strategies to Build a Sustainable Portfolio

Building a financial portfolio that takes into account non-financial criteria can quite quickly become a joyful jumble. Even for professional asset managers. And if, like 76% of French people, the impact of investments on the environment is a matter of concern to you, in practice, materializing such convictions in the selection of financial products can lead to unfortunate mistakes.
Here are 3 avenues to explore to help you calmly build your sustainable portfolio.

Reading Time : 3 minut(s) - | Published on 08-01-2024 11:50 

1. Utilizing ESG ratings and labels

For 3 years, the machine has been running wild in sustainable finance. In addition to the implementation of a stricter regulatory framework (European taxonomy, SFDR regulation...), finance is now marked by the development of numerous labels and the establishment of ESG ratings by various independent financial bodies (Bloomberg, Refinitiv, S&P, Moody's...).
These phenomenal progress allow investors to benefit from a particularly valuable set of benchmarks, especially when selecting collective investment schemes (CIS). Conclusion: We can only recommend that cautious investors start exploring the various existing ratings and labels to make a general first selection and choose the extra-financial themes that interest them.

Labels and ESG ratings: insufficient markers?

Note that the breakthrough of sustainable finance is extremely recent. Therefore, we can assert without fear that it's an art (and not an exact science) that is still in its early stages. The foundations for a better consideration of ethical criteria in investment choices are certainly being set, but we must remain lucid: confusion reigns. Novethic, very critical on this subject, regrets the lack of relevance of the reference systems used for ISR or Greenfin labeling.

So there is a strong chance that the rating benchmarks used today will have a completely different appearance tomorrow, crossed by regulatory changes and the application of new techniques. Are ESG ratings and labels insufficient to build a good ESG portfolio? Undoubtedly. But consider what the world of financial investments was just 5 years ago!

Assurance Vie

2. Conducting a custom research work

ESG labels and ratings are a perfectly credible first reference for starting to build a consistent sustainable portfolio. However, as you have seen: they are not without flaws! To delve deeper into your extra-financial efforts, you will need to do a much more personal, meticulous task, focusing on a mix of quantitative and qualitative data analysis. The practices of "due diligence" within the finance industry can provide a valuable model here.

For direct equity investments:

1. Large publicly traded companies publish a NFRD (non-financial performance declaration) every year, which can be interesting to peruse. You will find detailed, data-supported reports on potential extra-financial benefits and upcoming projects. Judged by your personal sensitivity, you can assess whether they are "authentically" sustainable.
2. Depending on a company's business model, it may be less relevant to consider certain dimensions than others. For companies that work in energy (TotalEnergies...), CO2 emissions are a major data point... but maybe not for banks (BNP Paribas...). In short, you have to be careful with the double materiality principle.
3. Lastly, you may try to assess the quality of the management's media appearances and the reputation of the company under study by discovering how traditional media tends to talk about it.

For equity or bond funds:

1. Study the KID (key information document) of the fund and the clear intention of the management policy.
2. Look at the details of the products in the portfolio. There may be some line choices that seem totally inconsistent with the stated policy.
3. Compare the fund's performance to those of its peers using tools like the Quantalys database. This year, some especially ESG-oriented funds have shown poor performances.
We can only encourage you, as far as possible, to favor this customized approach. Even though time-consuming, it proves to be the most effective way to build a portfolio that truly matches your style and helps you better manage the positive impact your savings can have on the world.

3. Don't overlook either your financial interests or the basics of portfolio management

Building a sustainable portfolio that reflects your personal beliefs is to your credit. However, an investment, like all respected investments, should be profitable for you. That is, it should be tailored to your financial goals and your risk profile. This should not be done at the expense of your personal interest, nor should it make you forget the basics of portfolio management (diversification, optimization of your return/risk).

An ESG investment that strictly follows the concept of sustainable development cannot be undertaken at the expense of its capital providers (shareholders, creditors...). Any competent management team should be able to carry out sustainable projects while carefully aligning the interests of all its stakeholders: environment, customers, suppliers, employees, shareholders, and creditors.

Also, you must be aware that certain sectors, such as new technologies, luxury, or financial services, more easily feature issuers with virtuous ESG profiles. Be careful, then, not to fall into the trap of building a sustainable portfolio with strong sector biases and insufficient diversification. To counter this possibility, a best-in-class approach will help you value the best ESG profiles while ensuring you maintain acceptable diversification.

Beyond materializing your ethical beliefs in the world around you, a well-constructed sustainable portfolio may allow you to bring traditional financial quality to your investments, reduce controversy-related risks, and better accomplish your financial goals.

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Sustainable investing: here's how to use ESG ratings