Five steps to building a sustainable portfolio

By Natasha Turner

The process of building a sustainable portfolio is largely similar to building a traditional one, but there are some differences particularly when it comes to the strategic and tactical asset allocation processes, according to a report by Credit Suisse.

The report Build for the future said investors looking to make an impact with their investments will struggle in liquid markets, so will need to make larger allocations to alternatives.

“Similarly, a large illiquid allocation may also affect the tactical asset allocation, as these illiquid allocations cannot be changed easily to take advantage of short-term tactical opportunities. The tactical asset allocation would thus need to be restricted to the liquid parts of the portfolio,” it said.

With that in mind, the report sets out five steps to building a sustainable portfolio.

The first, in order to generate this impact in private markets, is to use a fund of funds, which allows a faster deployment of capital into a diversified portfolio. In public markets, engagement is the main vehicle for impact so investor preference for fund manager engagement strategies can be set out.

Step two is to look at sustainable thematic investing and find funds that align with investor values in equities and increasingly bonds.

“Once investors have sufficient exposure to the higher-risk, sustainability focused impact and thematic strategies, they can then move on to choosing the core building blocks of the portfolio, most of which can be found in ESG integration strategies,” the report said for step three.  In choosing which groups have the best integration policies, it said to look at:

• Those demonstrating they are integrating ESG factors into their investment processes in a systematic way
• Those that provide examples of how ESG integration enhances the investment process
• Those with senior portfolio management executives who have ESG experience
• Commitment to global standards and who participate in initiatives focused on ESG, such as the UN Principles for Responsible Investment, Carbon Disclosure Project or the Net Zero Asset Managers initiative
• Those that report on their ESG integration and active ownership activities

The fourth step is to look at funds with exclusions, despite these not leveraging sustainability in a strategic way, if there are any allocations left to be made.

Finally, other exposure can be added if required, although the purpose is to fill the portfolio with sustainable investments. The portfolio can then be monitored, which may mean using additional measurement such as impact frameworks like Iris+ and the Impact Management Project.

The report shared a few example portfolios, including this one below for a 27-year-old ultra-high-net-worth human rights organisation founder with low liquidity needs:

Possible strategic asset allocation:
5% liquidity
10% fixed income
55% equities
30% alternative investments