Market commentary: Nov 2023

Portfolio performance

High inflation leading to high interest rates has been the investment story since March 2022. The result is reduced valuations of company shares, property, and bond investments – there was nowhere to hide, sorry. It’s no surprise that returns over the last year, while positive, are ordinary. Over the last month there has been increasing optimism that interest rates have peaked and will start to fall sometime in 2024. It’s only talk, and markets are always forward looking, but share markets and bond markets have already responded positively.

ESG risks impact investment returns

Intuitively it makes sense that analysis of company financial strength and strategy of a company is front of mind when deciding where to invest capital. But analysis in today’s world is far more sophisticated and encompasses analysis of Environmental, Social, and Governance (ESG) risks. ESG analysis measures risk in areas like climate change, supply chain labour standards, and company governance. If these risks are material this affects company cashflows and therefore shareholder returns.

Fund managers in your portfolio manage shareholdings in a wide range of companies listed on stock exchanges around the world. They employ analysts who undertake in-depth research of companies, the markets they operate in, management team quality, financial strength.

Over the last decade this analysis has expanded to include ESG risks. Fund managers typically have two primary ESG related goals. The first one being to lower overall carbon risk exposure across all companies in the portfolio, and the second is to manage overall ESG risk.

They use various tools to achieve this. A low carbon framework linked to the Paris Agreement seeks to lower carbon risk factors in the portfolio. I’ve seen results where the carbon score across the fund is reduced by two thirds. Sector exclusions are applied that remove companies that can be detrimental to society e.g. alcohol, tobacco, and weapons. In one case Heineken was excluded because of this. Companies with low ESG risks are up weighted and companies with high ESG scores down weighted under this system.

As long-standing investors, with long-standing relationships, fund managers can drive positive change in companies they invest in. They actively engage in shareholder voting to influence company decisions. For example, encouraging companies to commit to climate change risk management, to align remuneration to long term objectives, and prudent governance structures. This is positive for shareholder returns and ultimately positive for you as an investor in the fund.

Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFP^CM), Director and Financial Adviser