28 Sep 2022 4 min read

Three questions every ESG multi-asset investor needs to ask

By Andrzej Pioch

In the first instalment of a three-part series, we examine the consequences of implicit concentration for ESG investors.


Recently, a lot has been said about the importance of financially material environmental, social and governance (ESG) risks when analysing companies. Yet comparatively little has been said about integrating these risks in the context of wider portfolio construction considerations.

Amid the flurry of new ESG regulations and product launches it’s easy to lose sight of some valuable tools that have benefited multi-asset investors over the years and remain highly relevant as ESG rises up the agenda.

That’s because ESG investors are not immune to other portfolio risks simply because they want to go further when it comes to responsible investing.  

Question time

Once an investor is comfortable that a portfolio is aligned with their ESG preferences or meets their ESG objective, they should also ask themselves the following:

  1. Am I comfortable with the level of concentration in my portfolio in terms of countries, sectors, stocks or equity factors?
  2. Am I comfortable with the charges given the inevitable drag of fees on long-term performance?
  3. Am I comfortable with the stability of my portfolio’s risk level?

One trap ESG strategies can fall into is implicit concentration. In pursuit of better ESG credentials, investors might accidentally be fishing in a very small pond of companies; the companies that often feature among top 10 holdings in many ESG-focused thematic funds.

However, alongside their superior ESG profile, these stocks may introduce other biases. They may lead to over- or under-exposure to sectors or countries or other equity factor characteristics.

Consequently, the portfolio might carry implicit sector, country or factor risks that investors might not have fully appreciated going into 2022.

Case study: concentration risk in action

Looking at the performance of some of the UK domiciled funds with an explicit ESG focus, it is clear that for some of these investors, the hangover extended well beyond 1 January. As the chart below shows, the worst performer among our ESG peers recorded materially larger drawdowns in the first half of 2022 than the worst performer among our risk-targeting peers. We chose these two peer groups to control for the overall level of risk and allow for a like-for-like comparison of strategies without an explicit ESG mandate but targeting a given risk profile with the ESG equivalent with the same risk rating.


What happened? Given that the gap in performance is greater for higher-risk profiles, it could be driven by biases within equities rather than government or corporate bonds. Hence, we narrowed our search for answers and investigated implicit biases that a relatively more concentrated ESG equity strategy carried into the New Year. Here, for the purpose of illustration, we analysed one of the most popular UK ESG equity strategies in terms of 2021 net asset flows.

The charts below show the portfolio biases in terms of equity styles and sector exposure versus the broad market index (FTSE All Share) right at the start of 2022. Our analysis shows this portfolio carried a significant positive bias towards growth and small caps given the ESG opportunities in this area. That in turn meant lower exposure to value and low volatility stocks. The portfolio also had a significant overweight to information technology and financials with a lower weight in consumer staples, energy and materials.




Unfortunately, the inflationary environment and a significant re-pricing of the future path of interest rates wasn’t kind to factors such as growth, where longer duration of future cashflows translated into a greater sensitivity to changes in the discount rate.

It’s important to stress that this is rarely a one-sided risk and exposure to factors such as growth could at times reward investors with superior risk-adjusted returns. It did just that in the early months of the COVID-19 crisis, and many investors might be comfortable having a similar exposure over the long term. Nevertheless, the same biases that lifted ESG strategies in 2020 and 2021 suddenly staged a U-turn, and the greater the implicit biases in a given ESG strategy, the greater the gap to other strategies was.

Transparency triumphs

One way to potentially reduce the impact of relative biases is to choose an index strategy that limits country or sector differences but still provides an explicit ESG tilt. Ultimately, it is down to individual investors to decide on the level of concentration risk they are comfortable with in pursuit of their ESG objectives.

The challenge remains that the level of concentration or the implicit biases that creep into many strategies might not be fully appreciated by investors.

Fortunately, greater transparency and enhanced disclosures should help investors navigate this landscape and help to  secure ESG benefits through strategies with varying degrees of concentration, from ESG-tilted index trackers to traditional active funds.

In the second part of this blog, we will examine charges and consider what ‘the only guarantee in the world of investing’ means for ESG investors.  

Andrzej Pioch

Fund Manager

Andrzej is a fund manager who places a lot of importance on being mindful. He starts the day with a one-mile swim and a cycle to work. In the office, he focuses on multi-asset income strategies and multi-factor equities, and regularly lectures on asset allocation at one of the London universities. With his newly found enthusiasm for running, he now hopes to tick off one of his bucket list goals and take part in a triathlon. Watch this space…! Andrzej joined in 2014 after five years in the multi-asset team at Aviva Investors.

Andrzej Pioch