We recently launched a radically transparent new approach to portfolio scoring because, even as investment professionals, we often found it difficult to understand the true impact of ‘sustainable’ or ‘ethical’ investment strategies. Here’s a guide to help you understand how the scores add up.
Our approach to scoring grew out of a frustration with labels. Time and time again, we found that beyond the ‘ethical’ label or name, there was very little in terms of concrete data.
How could investors be expected to know how different these portfolios really were? Just how do supposed ‘ethical’ portfolios work exactly? And how can an investor be sure the portfolio aligns with their values?
To help you better understand your investments, we’ve used concrete data as the basis of our investment process and portfolio reporting to give you a true picture of where your portfolio stands on social responsibility.
Combining traditional and socially responsible metrics
The Nutmeg investment team uses a data and analytics platform from MSCI to inform our decision making with non-financial data metrics, focusing on environmental, social and governance (ESG) principles. This allows us to understand the companies in each of our portfolios in deeper detail, acknowledging the risks and opportunities presented by this data.
And of course, it allows us to compare securities and portfolios for these characteristics, alongside the traditional investment metrics ingrained in our investment process. This means we can understand both the absolute and relative impact of investing with a socially responsible focus, both from a risk, reward and sustainability perspective.
We’ve previously discussed how you should compare portfolios against ESG principles, and how we expect socially responsible portfolios to perform. But just what improvement should be expected in the portfolios’ ESG characteristics?
How do the scores add up?
Critically, it’s important to acknowledge that the scores are a representation of the current portfolio allocations. We manage our socially responsible portfolios in line with our overarching investment view, and that means scores will change as portfolio allocations shift. The investment team isn’t targeting a particular score for any given portfolio. Instead, the scores are an honest reflection of the current portfolio holdings.
To create the scores, we analyse each underlying holding for each ESG principle. We then create a weighted average of these scores based on the company or securities holding in the overall portfolio, to provide portfolio-level scoring.
It’s also important to know that these scores may not always be higher for every ESG characteristic in a socially responsible portfolio. We expect that socially responsible portfolios will typically have a lower carbon output and higher overall ESG scores than portfolios without a social responsibility focus, but individual data point scores could be lower depending on the underlying portfolio’s allocations. For example, it’s entirely possible for a portfolio to have lower carbon output and a higher overall ESG score, but a lower percentage of companies with more than 30% female board members.
Here’s how our socially responsible portfolios currently compare, on average, to an alternative without a socially responsible focus.
You can find definitions for each of these principles in our whitepaper. While the investment team won’t seek to explicitly maximise the scores of these portfolios, you’ll be able to see how they compare to a non-SRI portfolio at any time.
Next up, we take a look at how industry exclusions work. Spoiler – the results may surprise you.
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.