Once all the rage in the investment world, sustainable portfolios have fallen rather out of favour with investors and advisers alike.

We sought to find out just exactly what’s behind the decline of a once-popular product, and whether there’s any route back for them. 

Our interest in the matter was piqued when last month we noticed that Investec had quietly shut down its ESG portfolios – and we wondered whether this closure reflected a wider malaise in the sector.

So we spoke to some allocators to gauge their sentiment surrounding sustainable portfolios, and if their downbeat mood is anything to go by, then it doesn’t look good, folks. 

Here’s the laundry list.

A dearth of launches

When Premier Miton launched its MPS last month, there was a notable absence of a sustainable solution. We asked them about it and Ian Rees of Premier Miton's multi-manager team said it was "impossible" to consider launching such a product in the context of the SDR implementation, which has left wealth managers wondering how best to label these offerings to clients for almost a year now.  

Rees says it was one to watch, but that they did not feel they needed to do anything yet, "because we haven't seen sufficient enough demand or interest from advisers."

Indeed the only green launch we’ve seen this year is from Söderberg and Partners, who launched a ‘sustainable core’ solution in April. 

And if these strategies do launch, it seems to be out of a sense of obligation to advisers.

"Despite low and slowing demand, many DFMs say they need to offer a range of sustainable portfolios to be considered for financial advice firm panels," said Heather Hopkins, managing director at NextWealth. 

"Firms are shrinking the number of providers they work with. While flow may not be great to sustainable portfolios, sometimes, the range is needed to tick the box."

Go with the flows

As Hopkins touched upon, flows haven’t been great and this plays a significant role for allocators deciding whether to continue or not. 

"There seems to have been a cooling of demand in recent years and it seems likely that performance has been the cause," said James Crocker, partner at Albert E Sharp. 

"BP’s and Shell's share prices more than doubled through 2021-23. As a big index weight in the FTSE 100, ESG investors will have spotted this, missed out and voted with their feet."

Another issue is prevalent among passive funds, which typically form the fundamental building blocks of most conventional portfolios. 

Getting decent passive exposure while at the same time adhering to sustainability guidelines is tough, Crocker said. 

"We have difficulty with passive funds that have gone through an ESG filter in that we need to check that we agree with the filter," he said. 

"What constitutes an ESG-friendly fund is very much in the eye of the beholder, meaning that off-the-shelf passive funds frequently fail on one or more metrics."

Indeed Premier Miton added that there are a lot of 'light touch' passive products in the space priced similarly to their main indices, but that are not doing enough to combat real issues. 

Running costs

Sustainable portfolios’ inability to make the most of passive funds in their makeup has led to great variation in their composition and, in turn, their maintenance costs.

We received some data from Platforum’s latest MPS report which looked into the costs of maintaining ESG-friendly portfolios and how these compare to providers’ regular offerings. 

Their data suggests sustainable portfolios do not have to cost more than mainstream portfolios at present, but that the SDR programme could lead to increased costs for asset managers and wealth managers alike. 

The data indicates ESG and actively-managed offerings have the same median DFM charge of 25 basis points. 

Ben Seager-Scott, chief investment officer at Forvis Mazars, believes SDR will ‘probably require a little additional resource’, though to him that’s no surprise given the theme of recent years – ever-increasing regulatory costs to run services. 

Platforum also found sustainable portfolios have a wide range of price points depending on the underlying ratio of active to passive management. 

The underlying fund OCF can range from 15bps to 95bps depending on the approach to fund selection, making it difficult to get a clear picture of how much an ESG offering should cost.

“I do generally think that sustainable investing is currently best aligned with active management, mostly because terms like sustainability, ESG, ethical, and so forth are not standardised and it is rather difficult to create clear and effective rules to identify truly sustainable companies,” said Seager-Scott.  

Despite their recent tumult, however, Söderberg is standing by the belief that the next generation will be a force for change. 

Partner Fredrik Börjesson said they were offering sustainable solutions for young people to vote with their feet and invest in a different way to their parents and grandparents. 

As the great wealth transfer begins, we’ll be watching this closely.