Seeking Balance in Sustainable Multi-Asset Investing

12 October 2023

5 min read

David Hutchins, FIA| Portfolio Manager—Multi-Asset Solutions

Tiffanie Wong, CFA| Director—Global & US Investment-Grade Credit; Director—Fixed Income Responsible Investing Portfolio Management

A multi-asset approach to sustainable investing brings a broad and more balanced palette to paint with.

Investors turn to sustainable strategies for attractive return potential and opportunities to align with environmental or social themes. For many, it means taking advantage of a broad range of sustainable investment types, from equities and fixed income to non-traditional alternatives, such as real estate and infrastructure.

Balance Can Help Make Sustainable Investing… Sustainable

We think the broader sustainable investment universe provides another potential benefit when effectively and consistently applied: balance.

When unconstrained, a multi-asset approach can leverage a wide mix of sustainable investment building blocks to pursue returns and dial up or down risk levels over time—both of which are important to investors who prefer fewer bumps in their ride.

The Journey Should Map to Global Sustainability Themes

The ideal starting point for prospective sustainable investments are companies whose operations are tied to some or all of the 17 United Nations Sustainable Development Goals (UN SDGs). So far, 193 nations have pledged to hit UN SDG targets, which address economic prosperity, the environment and social inclusion, and it’ll take about US$90 trillion in investments globally to do so by 2030.

These are powerful tailwinds for companies aligned with UN SDGs, and they represent a roadmap of thematic opportunities across stocks, bonds and other investments for years to come. We consider health, climate and empowerment among the most logical and compelling themes, given the breadth of each’s supportive sub-themes (Display).

Three Sustainable Themes That Are Expected to Last

Sub-themes among global sustainable goals cut across cleaner energy, food security, education, employment and sanitation.

For informational purposes only.
As of October 2, 2023
Source: AllianceBernstein (AB)

More Levers, Less Volatility

Stocks have offered the most attractive long-term return potential compared to other assets, but they’re prone to short-term volatility and losses. Certainly, equities of all stripes (style, cap size, region, etc.) remain a key pillar in a sustainable portfolio, especially as more companies enter the ESG space and global opportunities expand.

US-based Hexcel, for instance, manufactures lightweight carbon fiber that displaces steel and aluminum in airplanes for better fuel efficiency—a boon to climate goals. Similarly, Adobe profitably empowers companies through its digital enterprise resources, leaving a very small carbon footprint in the process.

Similar alignments to global sustainability themes are also found in bonds, expanding the levers that multi-asset portfolios can use to make dynamic adjustments as markets shift. For example, the popularity of ESG-labeled bonds is exploding, with green bond issuance alone topping nearly US$4 trillion at year-end 2022, according to the World Bank.

Not All ESG-Labeled Bonds Are Alike

It’s important to understand how each ESG-labeled bond can uniquely contribute to a sustainable portfolio. They fall into two broad categories: use of proceeds, and sustainability linked.

Use-of-proceeds bonds finance specific green or social projects. Ørsted, for example, is a Danish energy provider targeting using 99% renewable sources by 2025. Proceeds from its green bonds will fund offshore wind farms and other renewables, conversion of gas and coal plants to sustainable biomass, and clean energy storage. Meanwhile, Scotland-based commercial bank NatWest Group’s social bond proceeds are aimed squarely at funding women-led enterprises.

Rather than financing individual projects, sustainability-linked bonds (SLBs) require that issuers meet specified sustainable key performance indicators within a specified timeframe—at the company level. For incentive, SLB frameworks can stipulate higher coupons if targets aren’t reached. Greece-based PPC, for instance, missed its 2022 year-end decarbonization target, and its coupon was stepped up 0.25% in March 2023 as a result.

Some ESG-labeled bonds may not have specific green or social targets for proceeds, but the issuer has set certain sustainability targets that it seeks to achieve. For instance, US Acute Care Solutions is a physician-owned provider of medicine, hospitals and observation services that strongly aligns with UN SDG health themes. The company is very employee-centric based on a “democratic ownership” model. Its in-network business model offers lower-than-average pricing compared to peers, and it takes measurable steps to ensure patient access to quality care while managing costs and fostering a diverse and inclusive workplace.

Talking Trash… and Trains and Tap Water

The diversification benefits of ESG-labeled bonds can go even further, considering the scope of issuers is much wider than companies, from non-profit agencies and provinces to sovereign nations.

Much like security selection, engagement* is a big part of the screening and integration process. Engagement entails meeting with issuers, reviewing their sustainability goals and even encouraging them to set more ambitious targets to attract investors.

AB regularly participates in early framing of an upcoming bond’s purpose and reach. For example, Canada’s finance department invited us to present our thoughts on a proposed seven-year ESG-labeled environmental bond in 2022, which at C$5 billion ranked it among the country’s largest and most sweeping. Bond proceeds were intended to finance nationwide biodiversity programs, cleaner transportation projects, wastewater management improvements, more renewable energy and other initiatives. AB has continued to engage with the Canadian government on topics such as green bond impact reports and future ESG-labeled bonds and frameworks.

Healthy Stretching: Alternative Assets Play a Role, Too

The traditional diversification benefits of stocks and bonds can’t always be relied on, as we saw in 2022. For this and other reasons, we think sustainable multi-asset investors should consider expanding, albeit selectively, into non-traditional assets, which are a growing part of the ESG world. Such alternatives today include digital infrastructure, such as power-saving smart buildings and renewable energy generation.

Regional exposure also matters, as does a variety of style (low volatility versus growth stocks) and low-correlating factors such as hedge fund premia and options. Integrating measured, complementary exposure among these outliers may especially help offset biases that can slowly creep up. This helps manage short-term volatility while enhancing diversification in issuers that contribute to positive environmental and social outcomes.

Sustainable multi-asset portfolio construction strives to combine the best opportunities across asset classes and the ESG universe. We believe the efficient integration of these ideas, including tactical maneuvers when conditions change, can help manage downside risk and provide a more balanced sustainable investing experience.

*AB engages companies where it believes the engagement is in the best interest of its clients.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.

About the Authors

David Hutchins, FIA

David Hutchins is a Senior Vice President and Head of AB's Multi-Asset Solutions business in EMEA. He is responsible for the development and management of multi-asset portfolios for a range of clients. Hutchins joined the firm in 2008 after spending two years at UBS Investment Bank, where he was responsible for devising and delivering innovative capital markets risk-management solutions for pension schemes. Prior to that, he spent 13 years at Mercer, where he served as a European principal and scheme actuary, providing trustee and corporate advice to a range of UK pension funds and their sponsors. Hutchins holds a BSc in mathematics and a PGCE from the University of Bristol. He has chaired the Investment Management Association's Defined Contribution Committee and formerly chaired the defined contribution industry working group for the UK government's "defined ambition" project. Hutchins is a Fellow of the Institute and Faculty of Actuaries. Location: London

Tiffanie Wong, CFA

Tiffanie Wong is a Senior Vice President and Director of Global & US Investment-Grade Credit, responsible for the management and strategy implementation of the firm's Global & US Investment-Grade Credit portfolios, including total-return and income-oriented credit strategies for institutional and retail clients. She has worked closely with AB's Quantitative Research team to leverage the firm's technology innovations within fixed-income trading and research to apply a more systematic approach to AB's credit investing. Wong also serves as Director of Fixed Income Responsible Investing Portfolio Management. In this role, she is part of the leadership team that develops responsible investment strategy across AB's Fixed Income business, particularly related to integrating environmental, social and governance considerations throughout the team's portfolio construction processes and overseeing management of several of the team's sustainable strategies. Prior to joining AB's Fixed Income portfolio-management team, Wong served as an associate portfolio manager on the Credit team, focusing on various strategies for the Global and US Credit portfolios—including total return, buy and hold, and liability matching. Before joining AB in 2012, she was a fixed-income portfolio analyst and trader at Segall Bryant & Hamill and a fixed-income portfolio associate at Wells Capital Management. Wong holds a BA in economics with a minor in business institutions from Northwestern University and is a CFA charterholder. Location: New York

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