ESG: The sustainable investment opportunity

The foundation of our investment philosophy is an evidence-based approach informed by a continuous and rigorous review of academic and industry publications, which includes important observations about financial markets. These evidence-based ideas lead us to carefully construct structured investment portfolios that are designed to meet the investment needs of our clients.

Within our models, we make use of Dimensional Fund Advisors's funds as they, too, believe in scientific research and sound investment principles that provide investors with a balanced investment approach. Their sustainability-focused investment strategies are geared towards providing a return on capital while tilting investment exposure towards companies with higher ESG scores.

By focusing on climate change and greenhouse gas emissions, we have the opportunity to build a sustainability strategy that achieves measurable environmental sustainability outcomes within a robust investment framework.

One key consideration for investors is whether they can adopt a sustainability focus and still have a good investment experience. For instance, is it possible to reduce a portfolio’s greenhouse gas emissions exposure while maintaining broad diversification and a focus on higher expected returns? Because sustainability issues range widely and vary in terms of importance and impact, investors also need to consider which sustainability criteria should guide their approach.

Dimensional incorporates insights from environmental science to determine which criteria are foundational in their sustainability strategies. This approach has led to a focus on climate change, and greenhouse gas emissions as the most significant driver of climate change. Therefore, the primary goal of Dimensional’s approach to sustainability investing is to reduce exposure to greenhouse gas emissions.

By focusing on climate change and greenhouse gas emissions, we have the opportunity to build a sustainability strategy that achieves measurable environmental sustainability outcomes within a robust investment framework.

Start with a sound investment approach

An effective investment solution must be based on sound investment principles. Dimensional starts with a broadly diversified, systematic investment strategy that emphasises securities with higher expected returns, as indicated by research, while also aiming to minimise unnecessary turnover and trading costs. For instance, in equity strategies, this means a greater focus on securities with smaller market capitalizations, lower relative prices, and higher profitability.¹ In their fixed income strategies, they use information observed from yield curves to pursue higher expected returns across bonds of varying duration, credit quality, and currencies of issuance.

By starting with a time-tested, systematic investment approach, we can build diversified, cost-effective sustainability strategies that pursue higher expected returns while thoughtfully integrating the environmental criteria that matter most.

Systematically integrate sustainability goals

It is important to carefully define the sustainability issues and data that a systematic investment strategy can incorporate. Informed by the work of leading academics and climate scientists, we can prioritise a set of climate change-related exclusion and scoring criteria that can be incorporated into a broadly diversified strategy. To do this, we need to understand not only the science of sustainability and the issues that matter to investors, but the availability, reliability, and usability of sustainability data, too.

Dimensional's approach prioritises addressing the primary driver of climate change – greenhouse gas emissions – while also considering related sustainability concerns, such as a company’s land use, toxic waste production, and water management, in a manner that permits company-level sustainability data to be integrated systematically across thousands of holdings. Additionally, emissions data are readily available from multiple sources, allowing for better data validation.

If the objective is to reduce a portfolio's exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may be de-emphasised or excluded from the portfolio altogether.

Dimensional evaluates companies using an emissions-focused sustainability scoring system that enables them to compare companies based on targeted environmental issues. This involves looking at companies across the entirety of a portfolio and within individual sectors. For example, if the objective is to reduce a portfolio’s exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may be de-emphasised or excluded from the portfolio altogether. An across-industry comparison of this nature provides an efficient way to significantly reduce the aggregate greenhouse gas emissions per unit of revenue produced by portfolio companies. Dimensional's approach may also rate portfolio companies on sustainability considerations relative to their sector peers, emphasising industry leaders with better environmental profiles and underweighting or excluding sustainability laggards.

Dimensional applies their climate change-focused approach to both global fixed income and equity markets. They build sustainability strategies that aim to help clients achieve their investment and sustainability goals concurrently and across asset classes.

A science-based approach to sustainability investing

When a sustainability-minded shopper reaches the checkout line at the grocery store, they no longer need to choose between a weak paper bag or single-use plastic—they can get out a reusable bag that carries their groceries effectively and demonstrates their commitment to sustainability.

We believe that’s also the case for sustainability-focused investors – they can pursue a sound investment experience that reflects their sustainability values. Using a patented investment methodology, Dimensional has effectively implemented sustainability strategies with these dual goals in mind for more than 10 years.²

By starting with a robust investment framework, incorporating sustainability considerations guided by climate science, and applying many decades of experience in data management, we are able to offer a cost-effective approach that provides investors the opportunity to align their investment and sustainability goals.

Speak to us about financial planning to see how we can create the right solution for your needs. Email wealth@sableinternational.com or give us a call on +27 (0) 21 657 1540 or +44 (0) 20 7759 7519.

Footnotes

¹Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book equity.

²Dimensional’s approach to sustainability investing is protected by U.S. Patent Nos. 7,596,525 B1, 7,599,874 B1 and 8,438,092 B2