How to create an effective RI strategy that aligns with clients’ expectations

Asmita Kanungo, National Director, ESG Practice Management, NEI on how to align your portfolio construction methodology with your practice’s purpose

How to create an effective RI strategy that aligns with clients’ expectations

Developing a responsible investing (RI) practice involves tackling ambitious but worthy goals. Whether it’s seeking a low-carbon future, increasing diversity in the workplace or pushing for gender equality, those targets must be articulated as part of your business. That means you’re talking the talk but how do you make sure you are walking the walk when it comes to portfolio construction?

Asmita Kanungo, National Director, ESG Practice Management at NEI Investments, told WP this requires an effective RI strategy to ensure your investments align with your own purpose statement and meet clients’ ESG expectations. If your purpose, which we covered in part one of this three-part series, is your guiding light for your practice, your RI strategy provides the guiding posts for your portfolio. This is what we’ll focus on in part two ahead of part three, which hones in on how to speak to clients about ESG.

To create your RI strategy, you must first establish what is most important to include in the portfolios from an RI lens. If you think of the traditional way of investing, you may have an investment strategy of investing in growth managers. This then acts as the guideposts for the portfolios. You wouldn’t invest in value managers once you’ve established that your investment strategy is to invest in growth managers. The same goes for RI strategy; it keeps you focused on what is most important to you and your clients.

Your strategy can be as simple as aligning your investments with the UN’s 17 sustainable development goals or can be more detailed, such as investing in impact funds where the goal is to generate measurable and beneficial social or environmental effects in addition to financial returns. Once established, you can then stay focused on what is important. The first step is to have that overarching strategy.

The next step is to determine your RI considerations. What are the key considerations you want to include when building your portfolios? What will go into your portfolios and what won’t?

For example, you can ask yourself questions such as: will you exclude any particular industry like tobacco, military weapons? Will you invest in funds that integrate a particular industry or have a theme, such as renewable energy companies or gender equality funds? Will you invest in funds that have a corporate engagement program and exercise proxy voting?

Identify what RI considerations will be integrated in the portfolios by, again, asking yourself what is most important to you and your clients. 

Once considerations are established, the next step in building out your portfolio is to know which investment solutions meet these criteria and, therefore, which ones fit your asset allocation. It’s also vital to determine how you will track this. Do the investment firms provide regular reporting on these considerations? For example, NEI has its Active Ownership Report and its proxy voting results are available to the public. Transparency is key and you want to ensure your suppliers can provide the information you need to make an informed decision.

“Through our RI Portfolio Construction workshop, we help advisors build their RI portfolios by educating them on the building blocks of a true RI portfolio,” Kanungo said. “Once you have built the foundation of your portfolios - RI strategy and considerations - and based on asset classes, then it’s about creating your due diligence process around which suppliers you will integrate into your portfolios. This is key, especially with the influx of ESG products coming out there.”

NEI has created a due diligence primer, which provides questions that the advisor can ask their suppliers, drilling down on considerations like corporate engagement, company or sector exclusions and ESG-integration process, so you are able to determine who is really walking the walk and can rank them accordingly.

A model approach

While advisors are always worried about providing a cookie-cutter solution to clients, Kanungo believes it’s difficult to be too customized in a portfolio. “You want more time with your clients, not more time building hundreds of portfolios,” she argued.

Building model portfolios, therefore, could be a good option. There may be some investors who feel particularly strongly about a certain area, and you should certainly customize to your clients that have that strong desire, but it should be possible to devise portfolios that satisfy the majority of your book of business.

Kanungo explained: “Where an advisor can customize is in their experience with the client, the financial planning and all the touch points. From an RI perspective, this involves finding out if your client leans more towards a certain element of ESG. For example, if your client leans towards more environmental values, and the funds they are invested in include corporate engagement, you could share an anecdote on how their investments are working with companies to move towards a net-zero economy. 

By pulling out areas of your portfolio to demonstrate alignment with clients’ values, the relationship builds. And if you are able to relate RI to your client’s personal life, it increases client engagement which means higher retention rate. We’ll explore the topic of how to talk to clients in part three of this series.