It’s easier being green if you think global

“It’s not easy bein’ green,” sang Kermit the Frog. But sustainable portfolio construction does get easier when investors take a global view, says Pendal’s Michael Blayney.

• Being green is best achieved thinking globally
• A multi-asset approach helps realise goals
• Find out more about Pendal’s Multi-Asset funds

“It’s not easy bein’ green,” sang Kermit The Frog. But when it comes to sustainable investing, taking a broad view of opportunities across Australia, Europe, North America and Asia can provide rewards well beyond the financial.

“In sustainable investing, you need to think about the global opportunity set,” says Michael Blayney, head of the Multi-Assets Investments team at Pendal.

“It gives you the ability to exclude some stocks, without overly impacting your portfolio, and there’s a good chance you’ll end up with a superior long-term return.”

Creating a sustainable equities portfolio using global stocks also allows investors to pick and choose the type of portfolio they want.

It might be based on companies that are making an impact on society. It might be based on a portfolio that excludes certain companies – tobacco companies or manufacturers of weapons, for example. Or it might be anything in between.

“There are many benefits that come from tilting a portfolio to place a greater emphasis on sustainability, from reduction of tail risks to better positioning the portfolio to benefit from the transition to a low carbon economy,” Blayney says, adding that sustainable investing is best done using a multi-asset approach, not just equities.

Part of the challenge sticking to single equity markets while investing sustainably is the lack of choice. If fossil fuel producers are excluded that may bias a portfolio towards other sectors.

In some markets, like Australian equities, fundamental active management is best positioned to mange portfolio biases. In international equities, the major portfolio construction implication is a lower energy exposure.

Some sectors necessarily lose out when screening is introduced, notably energy and utility companies. But in most other sectors, there are plenty of choices from clusters of stocks with similar characteristics, Blayney explains.

He uses fossil fuels as an example.

“Traditionally, the main benefit of fossil fuel exposure for investors was to provide some hedging against an unexpected increase in inflation.  

“But there are a range of assets available to a multi-asset manager which are correlated with fossil fuels and inflation but provide a more sustainable exposure. These assets can be used to retain the desirable aspects of fossil fuel exposure, without the undesirable tail risk and negative externalities,” he explains, highlighting the benefits of a multi-asset approach.

“When you go global, there are a lot of flavours to choose and you can tilt your portfolio to positive solutions,” Blayney says.

“Going global can also overcome benchmarking challenges in local markets. 

“Should investors continue to compare their performance to standard market capitalisation benchmarks or non-sustainable peers once they’ve made the decision to move sustainable,” he asks. “A benchmark should represent the available opportunity set and if this is modified by investors’ preference, the benchmark should reflect that.”

That needs a global marketplace.

About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

The team — which also includes Stuart Eliot and Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

• Pendal Multi-Asset Target Return Fund
• Pendal Sustainable Balanced Fund
• Pendal Sustainable Conservative Fund

Contact a Pendal key account manager here