Nothing to fear

This paper explains:

• Whyall investments entail trade-offs.

• The importance of having clear objectives

• Some of the trade-offs pertaining to specific sustainable approaches.

Trade-offs are part of everyday life. We make choices on how we work, what we consume, how much money we save and how we utilise our spare time.

Trade-offs are also a fundamental tenet of investing. Every investment decision is predicated on optimising and managing the inherent trade-offs between risk, return, liquidity, volatility and other considerations.

Trade-offs, then, should not be thought of as something that must be avoided at all costs. But we need to understand where trade-offs exist, assess their relative importance, and decide on a course of action based on a clear sense of our goals, needs and preferences.

What does this mean for sustainable investing?

First, we need to move beyond the polarised debate that suggests, on the one hand, that sustainable investing inevitably conflicts with positive investment performance, and on the other, that sustainable investing is always and everywhere aligned with positive performance. As with most things, the truth is more nuanced.

Start with clarity about the terms of the discussion. After all, sustainable investment is an umbrella term encapsulating a hugely diverse set of approaches. Each will have its own trade-offs on risk, liquidity, beta and, in some cases, returns.

While not intended to be exhaustive, the following examples explore some sustainable investment approaches and the trade-offs in expected investment outcomes they might entail.

Environmental, social and governance (ESG) integration

This approach is designed to deliver enhanced risk-adjusted returns through a holistic approach to research, valuations, asset selection and portfolio construction. It involves assessing a variety of financially material factors such as the quality of management, stability of supply chains, exposure to physical climate risks, or growth opportunities linked to sustainable solutions. It does not involve binding constraints or fixed allocations to sectors, regions or any other factor.