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The buyside interview


James McManus (pictured), Director of ETF Research at Nutmeg, explains how his firm uses ESG and ETFs within its portfolios…

What was the driver for launching the ESG offering at Nutmeg?

We knew from customer feedback – and the feedback of our own staff who are themselves users of the Nutmeg service – that there was demand for a socially responsible investment style. Our clients had expressed a clear preference to invest in-line with their personal values. They could often understand how their values align to other areas of their life, for example how sustainable their energy provider was, or whether the produce they purchase in the supermarket was free range or organic. However, they didn’t feel they had this same clarity when it came to their investment choices.

The problem was that there were very few pragmatic approaches available in the marketplace that were suitable for a broad range of retail investment goals, and transparent about their outcomes. Separately to this, we were also exploring the integration of ESG factors into our wider investment process and had formed a view on the importance of doing so. So, we set out to combine our investment expertise with industry leading ESG insights to offer investors the best possible current access to ESG themes, while ensuring they remained on track to their investment goals.

How big has it got?

A year after launching them, Nutmeg manages more than 8,000 socially responsible investment portfolios, with combined assets over GBP120 million. A fifth of new investments from our clients in 2019 have been into the socially responsible portfolios. For reference, we currently have more than 75,000 customers in the UK.

Who is using it?

Socially responsible portfolios are available across our product offering, from stocks and shares ISAs to pensions. Nutmeg is used by retail, mass affluent and high-net-worth investors to help them achieve their financial goals, so we have a broad spectrum of clients. 

The average age of an investor in a socially responsible pot is two years younger than the broader base at 37, compared with 39, and socially responsible investors are more likely to be female than the base a whole – 39 per cent compared to 35 per cent. We have found interest in this investment style from across our client base. 

How do you add the ESG element to your offering?

At Nutmeg, we’re using the term socially responsible investing, as we believe this term fairly reflects our customers’ interests in limiting exposure to companies that engage in controversial activities while increasing exposure to companies that lead their peers in social responsibility. Core to our approach was to ensure that our SRI portfolios retained the core features present in existing Nutmeg portfolios: a focus on diversification, global asset allocation, low costs and daily liquidity. 

Broadly speaking, we retain an active asset allocation approach, and execute our investments using exchange-traded funds (ETFs) to maximise diversification. We use strategies that screen for controversies or industries deemed to have a high social or environmental impact, while positively weighting towards those companies and bond issuers undertaking business in a progressive way relative to peers. 

Many of these strategies use MSCI indices, and so we have embedded MSCI’s ESG Manager platform into our investment process to deliver deep insight into strategy attributes, allowing us to effectively blend strategies within one approach.

How seriously do you take identifying ESG filters through your portfolios?

We take it very seriously. We became a signatory of the Principles for Responsible Investment in 2018 to make a public commitment to responsible investment practices (we were one of only a handful of UK wealth managers to do so). 

We believe that the core investment portfolio of the future will be one that considers ESG as central to its investment process. We also believe it will be incumbent on investment managers to report against ESG metrics. We have led the way here with the incorporation of ESG metrics into reporting for all of our investment portfolios. 

One widely held criticism of many ESG focused investment portfolios is the lack of qualification for their credentials. They typically do little to qualify to investors how they compare against traditional portfolios, meaning investors have little knowledge as to the true difference, or what trade-offs have been made along the way. We believe our customers deserve to know where their investment portfolios stand when it comes to ESG factors. That’s why we score all of our portfolios, SRI and non-SRI, against a range of ESG factors, using data from MSCI to empower our customers’ decision making. For example, you can see how your portfolio stacks up against a range of ESG issues, such as carbon intensity or board diversity. 

Any plans to develop this further?

Nutmeg is an acknowledged expert in the exchange-traded fund (ETF) market, so we hope to continue using our influence as an investor to engage with ETF providers on corporate governance and index suitability and selection in the market for sustainable and ESG funds. We also want to play a critical role on product development, feeding back what we hear from clients to ensure the ETF products being launched meet this demand. 

We’ve said from the start that the approach will evolve as the product set becomes deeper, but we also intend to work with our clients to help them better understand their investments and how they align to their values. 

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