Advisers facing unintended consequences of sustainability

Advisers are grappling with the ‘scarcity of sustainability’ in portfolios as they find a smaller universe of investment for clients seeking sustainable options.

In a panel session at the Janus Henderson conference, Adam Hetts, global head of portfolio, construction and strategy, said there were often unintended consequences which came from implementing sustainable options.

This included the smaller universe of investment options, the difference between traditional and sustainable portfolios and their respective performance and confusion for clients.

There were two types of advisers, he said, those which created separate sustainable models and those which tried to implement it into their existing traditional ones.

Hetts said: “What we are seeing in the thousands of client portfolios that we work with every year is that these advisers are shifting from traditional mode which was how they used to view portfolios and implement their sustainable portfolios.

“There’s a tilt and there’s a major translation of these portfolios and that translation often results in these new risks that are things like regional biases, sector concentrations and style drift.

“The risk isn’t coming from the sustainability but it is coming from what we think of as the ‘scarcity of sustainability’. If you’re used to thinking about traditional portfolios and you’re transitioning to this sustainable version of investing, you have a small fraction of the opportunity set you have with traditional models.”

He gave the example of European equities where only 10% were classified as sustainable, which fell to 5% in the United States. For fixed income, they were likely to need more investment grade which meant higher interest rate risk. This left advisers with “limited building blocks” to select investments for portfolios.

“The biggest risk to me is, the short answer is just the headaches, it’s those inconsistencies and those unintended or unknown risks and it just creates different portfolios. It’s not good or bad; it’s just different. It creates more questions, it creates more confusion for clients going to their advisers,” he said.