At Ledyard, we manage a variety of different types of portfolios for our clients, including a dedicated sustainable investment strategy. This strategy continues to grow and gain in importance to our clients in today’s world. Our team has been managing sustainable portfolios for more than ten years. We’ve learned a lot during this time and the field continues to develop.
The objective for our sustainable strategies is to select investments that provide the best balance between financial return and sustainable impact. I wanted to share this educational piece about how we manage our strategy to benefit you.
Sustainable minded investors seek to align their portfolios with their personal values. We believe that evaluating environmental, social, and governance (ESG) factors helps us form a more complete understanding of the long-term prospects of an investment. In this manner, we can help our clients to express their values and avoid unintended effects.
Source: Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals, CFA Institute
|Climate change and carbon emissions
||Gender and diversity policies
|Air and water pollution
||Audit committee structure
||Bribery and corruption policies
|Biodiversity and deforestation
Sustainable investments are identified by evaluating corporate behavior. One challenge is that corporate values and practices change over time, so we need to continually develop our knowledge. We use a variety of resources to examine corporate behavior, so that we can mitigate potential biases in our analysis. We believe that this type of scrutiny uncovers risks that could otherwise reduce the value of your portfolio.
The first determination involves assessing the investment prospects – return and risk. The analysis deepens by researching the ESG practices of the target firm. Good ESG practices might include saving energy, decreasing waste, or reducing employee turnover and related hiring costs. This should lead to a more productive, sustainable, and profitable business. Such companies may represent good candidates for investment. ESG risks could lead to consequences that could harm a company, such as lawsuits, fines, or reputational damage. These events could result in financial losses.
Ledyard partners with firms that use various approaches to support sustainability. We believe that managers who combine multiple methods have a greater chance of realizing sustainable outcomes.
- Negative Screening: Firms often avoid companies involved in potentially harmful activities. For example, some might exclude from their portfolios any investments in the fossil fuel industry. Others may steer away from companies that manufacture tobacco products. We seek managers that take a more nuanced view in differentiating between companies based on their practices.
- Positive Screening: Investors may choose to award capital to firms they perceive as good corporate citizens. They may invest in companies which are active in their communities or promote diversity. Or they might support more responsible use of natural resources or the transition to greener energy. Our fund managers consider many facets of corporate behavior when selecting investments.
These approaches involve increasing or decreasing the portfolio weightings to certain sectors. In some periods, that can benefit results. In other times, it may pose a headwind. For example, the energy landscape is evolving rapidly, with a growing global focus on renewable and clean energy sources. While short-term market fluctuations are normal, the long-term trend toward a more sustainable future remains strong.
Sustainable investors hope to drive constructive change in the world. There are two primary avenues to reach this goal.
- Active Ownership: Sustainable fund managers may engage in dialogue with corporate executives of the companies in which they invest. In this manner, they seek to influence the firm’s strategy and practices. We work with firms that have a seat at the table to encourage change.
- Impact: Firms may take direct action to improve their communities. Corporations might sponsor community development, or support access to education or healthcare for underrepresented groups. Some firms may provide funding for medical research. Other managers may join industry associations to drive policy changes. We believe that managers who demonstrate impact through action are truly devoted to making a difference.
The field of sustainable investing has been around for over fifty years in its modern form. During that time, the industry has evolved and become more refined. We have followed that progression and seek to implement these best practices in our strategy.
- Comprehensive Research: In recent decades many technology firms began reviewing and rating corporations based on their ESG practices. However, there isn’t a single industry standard for ESG ratings. For this reason, we prefer to invest with managers who combine those ratings with their own proprietary research when selecting sustainable investments. We believe that involving knowledgeable professionals focused on ESG factors leads to better results.
- Dedicated Resources: Many managers jumped on the ESG bandwagon to chase profits by launching funds that were sustainable in name only. Instead, we align ourselves with managers who have a long history of sustainable investing. These firms often have dedicated teams involved in sustainable research and corporate engagement. This demonstrates commitment to the discipline.
- Reporting Outcomes: Sustainable investors want to create positive change in the world, but they also want to see the tangible evidence of that engagement or impact. Dedicated sustainable managers produce reports which illustrate the effect of their investments. We seek to partner with firms that report how they have supported environmental, social, or governance practices through their corporate influence and actions.
The Ledyard team searches the universe for the most compelling mix of investments for your portfolio. We don’t sell in-house funds or have any fee-sharing arrangements that might influence our decisions. As fiduciaries, we avoid these conflicts of interest and always put your needs first.
We think that sustainable investing, conducted in a thoughtful manner, can help you reach your financial goals and align your investments with your values. Our investment team is here to help you navigate the growing complexity around sustainable investing. If you have any questions about our investment strategy or your portfolios, please don’t hesitate to reach out to me or your portfolio manager.
Jeff Gendron, CAIA, CEPA, Chartered SRI Counselor
Senior Portfolio Manager and Investment Strategist