ESG arrives in defensive managed portfolios

  • 23.Apr.2018
  • Simon Riordan,  XTB

Can’t I just invest in whichever company makes the most money and then give some of my profits to charity?

You may have heard this response before when the concept of ESG (ethical, social and governance) investing comes up. I used to think the same way. Five years ago if I said we were launching an ESG fixed income SMA, you would probably have thought we were crazy – today ESG investing is everywhere and interest keeps growing.

Sharper focus on ESG

ESG used to be a very small part of the market and one that was not taken very seriously.  ESG issues are now becoming part of the standard financial risks analysis of a company. More than ever very large companies realise that no matter what industry they are in, they have a social impact that needs to be managed. Facebook is a very good example of how poor management of these issues can directly affect share prices. Because better management of ESG issues leads to a lower risk company that ultimately investors will pay more for.

Impressive growth projections

A 2016 ESG report by the Bank of America estimated that the US ESG market could grow to $15 -$20 trillion dollars over the next two decades. This is roughly double the current size of the US equity market.  The demand is driven by millennials who are asking more of their investments. Feedback from Australian financial advisers supports this trend in demand.

If ESG investing is the future, maybe it’s worth considering now?

At XTB our goal is to provide all investors with access to individual corporate bond returns via the ASX. Access, transparency and choice are core values behind everything we do. We did not start out to run managed account portfolios or ESG portfolios for that matter. However, in response to market demand we are more than happy to provide this.

A number of advisory firms that specialise in ESG investing have been using XTBs for some time.  XTBs provide them with the ability to engage with clients and to select underlying bonds from companies that match their client’s values. Most noteworthy, this security-specific client engagement was previously only available with equities and has become a welcome addition to the defensive sector.

Karen McLeod from Ethical Investment Advisers in Brisbane said, “We are excited to see new developments in the ESG space, particularly in fixed income. Our clients want to know who they are investing with, SMAs of XTBs provide that next level of engagement and transparency that we have been looking for.”

As ESG investing has continued to grow over the past few years, so have requests from advisers for assistance in building ESG portfolios. Many advisers want to get involved in ESG investing but don’t know how to get started. At the same time, managed portfolios of direct assets have also surged in popularity.  So it was an obvious decision to combine the two to create Australia’s first ESG fixed income managed portfolio. As we are not experts in the ESG field, we have partnered with The Emerald Club to help with the ESG screening.

ESG in Managed Portfolios

ESG is very subjective. One client may view a company moving away from fossil fuels, as a positive and be happy to buy the security. While another client may hold the opposing view.  Managed Portfolios allow you to not buy or not sell a single security from the portfolio. This is a considerable advantage over managed funds and lets you build a tailor-made portfolio to meet your clients’ requirements.

More about The Emerald Club

The Emerald Club sits on the investment committee for this ESG portfolio. The Emerald Club came about from a desire to increase adoption of responsible investing in Australia. They believe financial advisers need to have better access to information about ESG investing and its benefits. This information can then be passed on to their clients. As a result, The Emerald Club aims to provide advisers with more adaptable tools that cater to the values and needs of Australian investors.

How is the portfolio created?

This ESG portfolio is a ‘light green’ portfolio which is the broadest selection criteria in the ESG scale. This gives the Portfolio Manager some flexibility in a fairly concentrated asset class in Australia.

  • The Emerald Club started with all available XTBs and investment grade senior bonds listed on ASX.
  • Based on Bloomberg ESG scores they remove unsuitable issuers to create the investable universe.
  • XTB CIO Ian Martin then builds the best portfolio from this universe to create the XTB Emerald Fixed Income Portfolio
  • The portfolio is currently available via the HUB24 platform.
  • The portfolio currently includes bank issued Green Bonds, where funds raised are specifically used to finance wind and solar assets.  Corporates who take positive steps to improve social and governmental risks are also incorporated in the portfolio.

A positive first-step for fixed income ESG

The ESG portfolio provides a tool to help advisers match client investments with their values and to provide solid, reliable returns. This ESG portfolio gives you the opportunity to increase the return being received from Term Deposits¹ or Cash and to balance the increasing client requirement for full transparency over where their funds are invested.


Key to ethical and green terminology

  • Ethical Investing, Socially Responsible Investing or ESG: The term describes an investment process that incorporates environmental, social and governance factors when selecting investments, in addition to the objective of achieving a competitive financial return.
  • Impact Investing: The primary goal is positive social change while delivering a financial return
  • Green Bonds: Certified Climate Bonds Standard bank issued bonds, used to fund environmental projects
  • Sustainability: How a company manages its long term viability based on ESG performance
  • Light Green: Broadest ESG selection criteria, allows more flexibility for manager
  • Dark Green: Stricter ESG selection criteria


Useful links

More about the Emerald Fixed Income Managed Portfolio

ESG Portfolio Fact Sheet

View all XTB Portfolios and SMAs

¹Term Deposits may enjoy the benefit of protection under the Financial Claims Scheme.

The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.


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