Building a sustainable portfolio

Sustainability is the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs.1 

This becomes a key element across many areas, including business strategy, lifestyle and consumer behavior, philanthropic activity, and investment mandates.

Global sustainable investing assets under management (AUM) reached over US$30.3 trillion in 2022, amounting to about 24% of total AUM.2  

This figure is expected to continue growing, driven by regulatory changes, data enhancement and technological enhancement.

Sustainable investing provides a unique opportunity for investors who seek to:

  • Reflect their values and worldview onto their investment decisions

  • Mitigate investment risks associated with Environmental, Social and Governmental (ESG) issues

  • Access the competitive returns that sustainably operated companies may generate over time 

  • Gain investment exposure to innovations driving environmental and social progress

  • Generate an incremental impact in the world

Increasingly, a growing pool of  investors are looking to achieve all the above.

What is sustainable investing?

 

The term ‘sustainable investing’ has, over the past two decades evolved into a collective descriptor for a range of approaches. 

Each approach has its own financial and sustainability objectives and is available across traditional and alternative asset classes. 

At Citi Wealth, we classify sustainable investing into four main approaches – Socially Responsible Investing (SRI), ESG Integration, Thematic Investing, and Impact Investing. 

These approaches are not mutually exclusive to each other, and a single investment product can combine multiple approaches to target exposure specific to what resonates with an investor. 

  1. Socially Responsible Investing, or SRI, refers to exclusion of companies or sectors based on specific values or norms. Common examples are the exclusion of tobacco, fossil fuels and weapons. 

  2. ESG Integration uses specific and measurable ESG metrics as an integral part of the investment process to identify opportunities. For example, by identifying companies with the strongest ESG attributes or companies poised to benefit from changing ESG metrics.

  3. Thematic Investments look to access strategies that are aligned with specific sustainability themes, like access to affordable healthcare, climate change, or water access and protection. Under the thematic approach, investments are made in companies that are deriving revenue from creating strategies to address sustainability outcomes.

  4. Impact Investments are based on a selection of strategies that are designed to deliver a potential financial return as well as a measurable, intentional, and incremental impact in one or more environmental or social areas.

Can a sustainable investing strategy be profitable?

 

A common misconception of sustainable investing is that performance has to be sacrificed.

Numerous studies, such as a report by the NYU Stern Center for Sustainable Business, found that sustainability initiatives such as low-carbon future planning, improved innovation, and risk management on ESG issues help to drive corporate financial performance. In fact, sustainable investments also provided potential risk mitigation, especially during a social or economic crisis. 3

Like traditional investments, different sustainable investments offer varying levels of financial outcomes and are exposed to market risks. ESG and sustainable investing may limit the type and number of investment opportunities, and, as a result may affect performance relative to other approaches that do not impose similar sustainability criteria.  

However, the risk adjusted returns are determined by factoring in relevant ESG-related risks in addition to market risks. Furthermore, sustainable strategies that invest in companies striving for the best ESG practices may shield themselves from evolving ESG-related risks down the road.

How can an investor build a sustainable investment portfolio? 

 

Start by establishing the goals. This will help to define appropriate investments as well as set criteria to measure their progress over time. 

Sustainable investing has dual goals. First, decide on the overall investment objectives – identify return expectations, risk tolerance, and liquidity, currency, and geographical preferences. Once these are established, it is time to reflect on the sustainability objectives.

Here are some questions to help align a portfolio with sustainability objectives:

  1. What does sustainability mean to the investor?

  2. Are there any particular sectors or companies that should be avoided?

  3. What outcomes are important? Are these outcomes regional or global? Are there any specific themes to explore within the portfolio, such as gender, clean water, or renewable energy? 

  4. What are the suitable investment vehicles according to the investment objectives outlined?

At this stage, an investor can also decide how much of the portfolio to dedicate to sustainable investments. Should there be a sustainability lens to just a portion of the portfolio or across the full suite of investments? 

Once the investments are narrowed down, the next step is to do due diligence. Simply because something is labeled as “sustainable” or ESG-related, does not mean it aligns with the intended values and goals. 

Evaluate the investments’ alignment with the desired financial and sustainability objectives and be aware of any potential risks and exposure to controversial sectors. 

Over the course of the investment period,  conduct periodic assessments, including reviewing any impact/progress reports available and analyzing the impact of incorporating sustainability into the portfolio, to ensure that the portfolio remains aligned with stated financial and sustainability objectives. 

KEY TAKEAWAYS:

 

Sustainable investing provides a potential opportunity for investors to align their portfolios with their worldviews, mitigate potential sustainability-related risks and/or capitalize on innovations that support sustainable development.


There are four main ways to approach sustainable investing – Socially Responsible Investing, ESG Integration, Thematic Investing, and Impact Investing.


Investing in sustainably operated companies and sustainable investment strategies limits the type and number of investment opportunities but could provide potential risk mitigation and mitigates against ESG-related risks to a greater degree than non-sustainably operated companies.


There is no one approach to sustainable investing, and no single approach towards building a sustainable portfolio. It is an evolving journey for investors to take to transit their portfolios towards sustainable investing.