We’re hearing from advisers that an increasing number of clients are considering investing a portion of their money sustainably. While many outcome-based solutions are in MPS (managed portfolio service) form, abrdn’s MyFolio Sustainable range is a fund-of-funds solution.

This multi-manager structure allows easy rebalancing and minimises costs. It’s tax-efficient, and it allows us to negotiate rebates for the direct benefit of underlying investors. But how does a fund-of-funds solution invest responsibly?

From Impact to Enhanced ESG

The MyFolio Sustainable range offers long-term strategic asset allocation (SAA) aligned to five long-term risk objectives and active fund selection. It’s the same core investment process as for all MyFolio solutions. The MyFolio Sustainable range also provides access to a spectrum of investment strategies with broad utility including Impact funds, Sustainable funds, and Enhanced ESG (environmental, social and governance) funds.

These vehicles aim to help tackle sustainability issues in several ways, from avoiding controversial investments, to investing in environmental and social solutions, to encouraging companies to be more responsible.

For example, by investing in other funds, the MyFolio Sustainable range allocates capital indirectly towards impactful businesses that provide transition solutions. This includes companies with products and services for adapting and mitigating the effects of climate change. The range also focuses on vehicles that invest in firms working towards the transition away from single resource use and fossil fuels.

As well as playing a part in helping society and the planet, we believe sustainable companies with strong ESG credentials have the potential to generate attractive returns for investors. Some companies will be winners while others will be losers. We seek to invest in the former via the funds we select, and minimise our exposure to the latter.

Sustainability embedded

How does a fund of funds direct capital towards the right companies? Analysis of the data behind a manager’s decision-making process is key to identifying a suitable fund. We are fortunate to have complete transparency on managers’ positioning and access to informative data vendors. This allows us to challenge managers’ decision-making and aggregate exposures based on impact, sustainable and ESG factors. This analysis reveals a lot about how a manager has dealt with the changing landscape and emergent risks.

We always want to hear about managers’ approaches to engagement, too. How do they interact with the companies they are investing in, to voice their ESG concerns and promote change? Do they use their shareholder vote to support their ESG views?

The benefits of experience

It helps that abrdn has significant experience in managing sustainable mandates. Having run the Aberdeen ethical range since 2002, we have been investing in some of the funds in the sustainable universe for years. This gives us access to long-term data and the experience to interview and analyse managers effectively.

One example is Sparinvest Ethical Global Value, an exposure within our global impact allocation. This fund is focused on the key industrial and manufacturing companies aiding the transition, as well as those banks and financial companies who are helping to finance it.

Thanks to these exposures, Sparinvest Ethical Global Value performs in a diversifying manner compared to sustainable peers, including over the recent period when interest rates and the cost of financing increased.

An expanding opportunity set

Over the past three years of the MyFolio Sustainable range, the opportunity set has grown and the quality of funds available has also improved.

Ecofin Global Renewables Infrastructure is one of our more recent investments. It’s an infrastructure fund that specifically seeks to invest in power generation companies and businesses aiding the transition towards a net zero electricity grid.

The fund has a meaningful exposure to renewable energy companies or manufacturers, as well as significant exposure to traditional electric utilities that have taken decisive steps away from carbon-based power generation.

EcoFin has been running this fund since 2015 and has built a database of power generation companies which it uses to benchmark the carbon trajectory of the fund. The fund qualifies as an Impact fund, and as Article 9 under the European Union’s SFDR (Sustainable Financial Disclosure Regulation).

Its managers aim to outperform traditional infrastructure benchmarks and produce a sustainable outcome.

Capturing climate risk

In addition to fund-specific ESG analysis, we also incorporate climate scenario modelling within our SAA framework, in calculating our long-term expected returns.

Working with a partner company, Planetrics, we've created 16 climate pathways that account for various potential policy, technology and behavioural scenarios. The weighted average effect of these pathways forms an adjustment to the core long-term expected returns that we use in our SAA.

Through this process we aim to capture the fact that some countries or regions, sectors and companies are more likely to be affected by physical risks related to climate change. Some will also be affected positively and negatively by the transition to a sustainable economy.

We've also created a bespoke SAA for our MyFolio Sustainable fund range which allows us to invest in Global Impact funds. We consider sustainability and ESG at every stage of our investment process.

Where next for active multi-manager sustainable solutions?

The next big milestone for sustainable investment solutions is clearly the recent announcement of the rules and implementation date of the UK’s Sustainable Disclosure Requirements (SDR). With SDR, the Financial Conduct Authority (FCA) aims to tackle 'greenwashing' and provide clarity to investors about the efficacy of the sustainable investments in responsible funds. We welcome the changes the FCA have announced.

We’re looking forward to making the most of our growing opportunity set by ensuring that the MyFolio Sustainable fund range is SDR-compliant. We also anticipate that SDR will give us the opportunity to further improve and develop sustainable strategy using our current SAA structure, providing continuity with our track record. The future looks promising for sustainable investors.

The objective of the MyFolio Sustainable range is to generate growth over the long term (5 years or more) while being managed to a defined level of risk. The range offers five funds with different expected combinations of investment risk and return that follow the abrdn MyFolio Sustainable Investment Approach. For more information about each fund in the range see the Key Investor Information and abrdn MyFolio Sustainable Investment Approach available on www.abrdn.com

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Tax rules can change.