Three years of socially responsible investing at Nutmeg

Just over three years have passed since we launched our socially responsible portfolios, setting out to offer our clients a way to invest in a managed portfolio that incorporates environmental, social and governance (ESG) criteria, while still adhering to the core investment principles we believe are most critical to an investor’s long-term success.

Serving our clients by bringing costs down

When we launched our socially responsible portfolios, we did so with the expectation that fund costs would come down and the choice of investment assets would broaden – and they have.

As an investment team, we are continually engaging with major ETF providers on product development themes. It’s encouraging that since we launched the portfolios, we’ve seen the number of ESG-focused ETFs expand rapidly, becoming arguably the fastest growing segment of the asset management industry. We’ve been able to expand the asset classes included in our SRI portfolios and will continue to do so in the future.

What’s more, we’ll continue to work hard on your behalf to bring the costs of investing with a socially responsible focus down. Since launch, the average cost of fund fees for our portfolios has fallen from 0.33% to 0.27%, a drop of over a sixth, in part due to the engagement of our team with ETF and index providers.

We led the industry on transparency

Today, ESG considerations are at the core of many Nutmeg clients’ investment goals, and very much a mainstream concern in the personal finance pages. But back in 2018, we bemoaned the confusing language used by the investment industry, alongside the lack of clarity that over simplified labels and a lack of true data points brought to investment products labelled as ‘sustainable’ or ‘responsible’. Our clients told us that investing can often feel like a blind spot when it comes to how your investments align with your personal values. We set out to change that.

To counter the confusion, we took a bold step and led the wealth management industry in providing a range of ESG metrics and data points for every Nutmeg portfolio, whether or not is has an explicit socially responsible focus. These metrics offer our clients insight into how each of our investment portfolios measures against a range of environmental, social and governance factors, offering comparable insights rather than marketing slogans.

Since our portfolios were launched, others have followed and in 2019 European regulators instigated a regime that aims to deliver on the very same principles – imposing mandatory disclosure of ESG characteristics for asset managers across the EU.

While these rules may not apply in the UK, our local regulator the FCA has recently launched its own consultation on the approach to UK markets. It’s a significant step that we welcome in reducing greenwashing (disingenuous marketing spin), and offering clearer, better-defined understanding of investment products seeking to achieve sustainable or socially responsible outcomes.

The performance trade off

Back in 2018, our clients told us one of the primary fears around socially responsible investment related to the potential performance trade-offs. Surely incorporating an approach that prioritised environmental, social and governance characteristics alongside traditional financial metrics would require some performance to be sacrificed?

Rather than assume that incorporating these factors into an investment process will lead to lower returns, we believed there was a significant body of academic and industry evidence to support socially responsible investing having the potential to lead to higher returns, with our own analysis showing that there were no meaningful (statistically reliable) differences in the performance of strategies incorporating an SRI focus and those that don’t (our studies used the same established SRI investment strategies that underpin many of the SRI-focused exchange-traded funds in our portfolios).

So, we’re pleased to report that the portfolios have delivered exceptionally strong performance for the first three years since inception, comprehensively outperforming our peer group of wealth managers at every comparable risk level in its first three years (see chart below), while also delivering performance in excess of other Nutmeg portfolio ranges over the three years since inception.

Source: Nutmeg data, 30 September 2018 to 30 September 2021.

Of course, past performance is no guarantee of future returns. But overall, we expect our SRI portfolios to deliver performance over the long term that is similar to that of an equivalent portfolio without an SRI focus. That is, by incorporating a social responsibility focus we don’t expect there to be a performance trade-off for investors in the medium term.

From the minority to the mainstream

As predicted, investing with an ESG lens has moved from the minority to the mainstream. The past three years has continued to see an increasing body of evidence, both academic and industry driven, that supports the case for improved investor returns through the management of ESG risks and opportunities.

At its core, ESG analysis is not simply related to improving the environmental characteristics of an investment, but rather about incorporating ‘non-financial data’ sets alongside traditional measures to better inform investment decision making. This means identifying exciting new growth areas in the economy while also avoiding industry models that will be left behind; recognising the long-term factors that will shape structural change in the years ahead.

A growing number of Nutmeg clients are choosing the socially responsible portfolios, and this is especially true of younger investors. Our own research of 2,000 UK adults found that a quarter of 25- to 34-year-olds said that since the pandemic began, they are much more likely to seek out SRI.

Looking ahead at how SRI will continue to gain widespread traction, a separate survey of parents, carried out by Nutmeg, found the vast majority say they are now more likely to opt for a socially responsible Junior ISA than they were previously, with 48% of those who would opt for a socially responsible JISA saying the pandemic has encouraged them to re-evaluate their perspectives.

Nutmeg’s commitment to ESG investing is as strong as ever

As our clients’ investment needs change, so must our offering, meaning we are committed to integrating ESG practices not only in our socially responsible portfolios but also in our wider investment proposition.

As a business and a custodian of our clients’ assets, we are taking a long-term perspective in the management of our portfolios. In 2018, we adopted a responsible investment policy that committed us to apply best practice when it comes to the integration of ESG factors within our investment decision making, and we consider responsible investment as core to our operating principles, clients, and company culture.

In late 2020, we launched our Smart Alpha portfolios powered by J.P. Morgan Asset Management, which share our joint commitment to sustainable investing.

And in 2021, we evolved our strategic asset allocation to establish a greater integration of ESG considerations, with a belief that deeper ESG integration can improve the long-term risk and reward characteristics of our portfolios.

Three years ago, we stated our belief that social responsibility focused strategies are the future of the investment management industry and that we’d continue to invest in and expand our approach.

Today, we continue to believe that the core investment portfolio in the future will be one where ESG characteristics are considered and prioritised alongside traditional investment metrics.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance. Tax treatment depends on your individual circumstances and may change in the future.