Advisors facing the unintended consequences of sustainability

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Advisors grapple with the “scarcity of sustainability” in portfolios as they find a smaller investment universe for clients looking for sustainable options.

Speaking at a panel discussion at the Janus Henderson conference, Adam Hetts, global head of portfolio, construction and strategy, said that implementing sustainable options often has unintended consequences.

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 who created separate sustainable models and those who tried to implement them into their existing traditional models.

Hetts said: “What we’re seeing in the thousands of client portfolios we work with each year is that these advisors are moving away from the traditional mode, which was their way of visualizing portfolios and implementing their sustainable portfolios. .

“There is a tilt and there is a major translation of these portfolios and that translation often brings these new risks which are things like regional biases, sector concentrations and style drift.

“The risk does not come from sustainability, but from what we see as the ‘scarcity of sustainability’. If you’re used to thinking about traditional portfolios and switching to this sustainable version of investing, you have a small fraction of the opportunities you have with traditional models.

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

“The biggest risk for me is that the short answer is just the headaches, it’s these inconsistencies and unexpected or unknown risks and it just creates different portfolios. It is neither good nor bad; it’s just different. It creates more questions, it creates more confusion for clients who come to their advisers, ”he said.


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