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ESG investing is not just about ethics, but risk management too

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Socially responsible investing (SRI) aims to generate returns for investors while taking the sustainability and ethical impact of the investment activity into consideration. At Unigestion, we believe that integrating ESG criteria into our decision making process is essential to better understand the risks of our investments and therefore has a positive impact on the risk-adjusted performance of our portfolios. This paper seeks to outline the ways ESG issues are incorporated into our equities investment process and also considers whether the inclusion of ESG filters, based on clients’ specific ethical criteria, impedes a portfolio’s ability to deliver an attractive risk/return profile, consistent with that of a traditionally managed strategy.

By Maria Musiela, Investment Specialist, Equities

History of ESG risk management at Unigestion

Unigestion has been running risk managed equity portfolios since 1997 and risk managed SRI strategies since 2004.  Managing risk lies at the heart of our investment philosophy and is part of the DNA of all of our equity strategies. We actually view risk management as a means to achieve outperformance and believe that the inclusion of environmental, social and corporate governance criteria can form an integral part of this comprehensive and holistic risk management approach.

Growth of Unigestion ESG/SRI Assets

Growth of Unigestion ESG-SRI Assets

Source: Unigestion as at 30 September 2017


Unigestion’s equities team manages a range of ESG/SRI solutions, combining pooled funds and segregated mandates, with a total of EUR3.5bn assets under management and managed in accordance with our clients’ respective stock exclusion lists or by excluding specific activities/sectors (such as fossil fuels or bonded labour practices) from the investment universe. Moreover, we recognise that many of our clients have their own ESG and ethical vision, policies and criteria. Therefore, we have ensured that our process has the flexibility to provide bespoke solutions that combine our clients’ SRI/ethical convictions with Unigestion’s investment management, philosophy and expertise.

Notably, Unigestion was selected as subadvisor of the K Invest Low Carbon Global Equity Fund in 2016, co-developing the low carbon approach with Kirstein A/S, a leading financial consultant in Denmark.  The fund aims to achieve above average returns through our 360° risk managed approach, while producing a significantly reduced carbon footprint. The fund targets a 75% reduction of carbon emissions compared to that of the MSCI World Index. We believe this fund proves it is possible to significantly reduce the carbon footprint of a portfolio without foregoing risk-adjusted returns.


Evolution of SRI at Unigestion

Evolution of SRI at Unigestion


Our approach

ESG factors can represent significant challenges for companies and can pose a considerable threat to the long-term stability of an investment and its ability to perform according to our expectations, but these risk are not always recognised by the wider market. Our active risk-based approach aims to identify those companies where risk factors, including ESG risks, are not priced into the current valuation so that they can be excluded from our equity portfolios.

ESG issues are managed at a number of levels within our investment process:


a) Specific risk filtering:

During the initial stage of our process we systematically filter the investible universe in order to remove stocks with specific exposures from our risk managed equity portfolios, these include:

  • ESG risks: this filter eliminates stocks with specific ESG exposures, such as environmental or corporate governance issues, treatment of workforce, legal problems, merger and acquisitions or fraud. These are all issues which we believe will affect a stock’s future risk profile.
  • Controversial weapons exposure: we exclude stocks with direct exposure to controversial weaponry, including cluster bombs, landmines, depleted uranium, as well as chemical and biological weapons.
  • Excessive carbon intensity: we believe companies emitting high levels of carbon are more exposed to downside valuation risks given potential regulatory changes and greater investor focus; therefore, we filter out stocks with excessive carbon footprints.
  • SRI/ethical filters: we can also incorporate stock, activity or sector exclusions in line with our clients’ specific SRI criteria.


b) Qualitative validation of the portfolio:

Our systematic filters are supplemented by internal qualitative research by our team of fundamental analysts; we also use ESG research provided by Vigeo Eiris and climate risk specific data provided by Trucost. This second layer allows us to perform thorough bottom up assessments of companies before they enter our portfolios and to validate our equity positions on an ongoing basis.


c) Active ownership initiatives:

As a significant owner of equities, Unigestion’s practice is to actively engage with our held companies on a variety of topics including those that are director related, routine business, relating to reorganisation and mergers, concerning health and environment, as well as corporate governance issues. We believe it is our responsibility to voice our opinion/concerns when relevant and request that these be addressed. Our engagement activities are also fully aligned with our voting priorities, as they are both driven by Institutional Shareholder Services’ (ISS) guidelines on International Sustainability Proxy Voting.

Where possible, Unigestion casts votes on all shares under its control in the context of the Uni-Global SICAV pooled funds and for some segregated mandates when requested by the client. Our proxy voting is carried out by ISS, based on their International Sustainable Proxy Voting guidance which recognises that sustainability, or ESG factors, can present material risks to portfolio investments. ISS’ Sustainability policy seeks to promote support for recognised global governing bodies promoting sustainable business practices, advocating for environmental stewardship, fair labour practices, non-discriminatory policies and the protection of human rights.

As a signatory of the UN supported Principles for Responsible Investment (PRI), we also participate in engagements coordinated through their Collaboration Platform and selectively participate in collaborative engagements with other like-minded asset managers and asset owners on specific issues.

ESG initiatives at Unigestion


d) Monitoring of carbon footprints:

Portfolio analysis and the reporting of ESG factors, and in particular climate risk monitoring, form the final part of our process. We regularly review and monitor our portfolios’ carbon footprints to help us better evaluate their exposure to climate risk. In addition, we have signed the Montreal Carbon Pledge, committing to measuring and publicly reporting the carbon footprint of our equity funds on an annual basis. Carbon footprint reports also form part of our regular reports to clients. We are pleased to provide this high level of transparency to help clients and investors better understand, quantify and manage climate change-related impacts, risks and opportunities.


Impact of incorporating ethical considerations: a case study

The monitoring of ESG risks form an integral part of our 360° risk management process as they can have a significant impact on the risk return profile of investments. However, there is less evidence to suggest this is the case with ethical considerations, which tend to be driven by the specific values of an individual investor. For example, religious organisations may choose to exclude certain pharmaceuticals or alcoholic beverage producers based on their beliefs, but such activities may not be a concern to other groups of SRI minded investors.

Investors wishing to incorporate ethical screens may be concerned that such filtering could hamper the risk/return profile of their investments, by limiting the investible universe, potentially compromising the opportunity set and ability to effectively diversify their portfolio. However, this doesn’t have to be the case. We believe our investment process is robust enough to incorporate a number of exclusions, based on clients’ specified ethical criteria, without impacting the ability to deliver returns that are consistent with our traditionally managed strategies.

As an example, we can compare one of our SRI screened European equity mandates with our traditionally managed European equity strategy, the Uni-Global – Equities Europe fund, which is not screened for ethical considerations but does incorporate our other ESG filters.

The table below illustrates the exclusion criteria for the portfolios under analysis:

Exclusion criteria for Unigestion portfolios

Exclusion criteria for Unigestion portfolios

Given its high level of ethical criteria, the SRI mandate excludes 28.4% of the investible universe (the MSCI Europe Index), which represents 71 stocks versus 0 stocks for our traditional strategy. However, it is worth noting that both of these portfolios include our broader ESG filters, which in this instance has resulted in the exclusion of 1 company based on its controversial weapons restrictions, 9 companies due to their excessive carbon intensity and a further 3 stocks for other ESG criteria.


Risk/return profiles

Risk/return profiles

Source: Unigestion and Bloomberg. All figures shown gross of fees; to 29 September 2017. Past performance is not a guide to future performance.


The above table considers the impact these exclusions had on performance. Our portfolios outperformed the benchmark across all time periods, at a lower level of volatility, illustrating the positive impact of our 360° risk management investment process. In addition, we note that there has been no negative impact on the risk/return characteristics of the Ethically Screened Portfolio, even though the investible universe was reduced by 30%.


Cumulative Returns

Cumulative Returns - ethically screened portfolio

3 year rolling volatility

3 year rolling volatility - ethically screened portfolio

Source: Unigestion and Bloomberg. All figures shown gross of fees; to 29 September 2017. Past performance is not a guide to future performance.



As a signatory of the Montreal Pledge and the UN supported PRI, Unigestion has committed to continuously scrutinise the way ESG issues are respected, measured, reported on and handled throughout our investment activities and to making ongoing improvements.

ESG risk awareness is an important component of our 360° risk management process across all of our strategies. For clients with more specific requirements, we offer SRI-based strategies, with ethical filters to address client concerns. In this paper, we have illustrated that the inclusion of client defined ethical screens does not have to impede a portfolio’s ability to deliver an attractive risk return profile and that the return pattern of an SRI solution can be consistent with that of a traditionally managed strategy.


Important Information

This document is addressed to professional investors, as described in the MiFID directive and has therefore not been adapted to retail clients. It is a promotional statement of our investment philosophy and services. It constitutes neither investment advice nor an offer or solicitation to subscribe in the strategies or in the investment vehicles it refers to. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment. These are not suitable for all types of investors. The views expressed in this document do not purport to be a complete description of the securities, markets and developments referred to in it. To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks. Data and graphical information herein are for information only. No separate verification has been made as to the accuracy or completeness of these data which may have been derived from third party sources, such as fund managers, administrators, custodians and other third party sources. As a result, no representation or warranty, express or implied, is or will be made by Unigestion as regards the information contained herein and no responsibility or liability is or will be accepted. All information provided here is subject to change without notice. It should only be considered current as of the date of publication without regard to the date on which you may access the information. Past performance is not a guide to future performance. You should remember that the value of investments and the income from them may fall as well as rise and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. An investment with Unigestion, like all investments, contains risks, including total loss for the investor. Document issued on: 27 November 2017. Ref: 00022.

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