Fifty Shades of Green

While we have previously discussed a quantitative framework in constructing and optimising portfolios on an ex-post basis in older editions of our ETF reports, the first step in the investment process is to adequately gauge a client’s objectives and constraints through the development of an Investment Policy Statement (IPS). Fundamental to the construction of any investment portfolio, return objectives and expectations must be tailored such that they consistent with risk objectives. An IPS may target this on an absolute basis or state a discrete rate of return, hurdle or benchmark, in order to appraise the delivery of investment objectives and aid in assessing relative portfolio performance. Risk and return objectives must also be consistent with any further circumstantial constraints, such as value and beliefs, which are likely to have a material impact on portfolio composition. In what is becoming an increasingly mainstream application, a large proportion of investors are now seeking to explicitly include non-financial considerations within their IPS formulation. Sustainable investing recognises that Environmental, Social and Governance (ESG) considerations may impact the long-term risk-return profile of financial assets while also acting to express the cultural conviction of clients.

Authored by Hayden Nicholson – Specialist Exchange Traded Funds & Listed Investment Companies at Bell Potter Securities, 21 September 2021
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