EQ Future Leaders Portfolios: Peer group comparisons

As we mark the third year anniversary of the launch of the EQ Future Leaders Portfolios, we share what we believe makes the portfolios stand out against other sustainable passive MPS solutions.

by Johnny Bowie, 17th March 2023

We have applied our sustainability analysis to a set of six anonymised, passive sustainable peers within the managed portfolio service (MPS) market with a range of results.

Intentionality to address the UN SDGs

Source: EQ Investors

The EQ Future Leaders Portfolios intentionally aim to have higher exposure to the UN Sustainable Development Goals (SDGs) than traditional investments.

The SDGs provide a framework to outline the most pressing social and environmental challenges we face, with the EQ Future Leaders Portfolios looking to align with them through investing in companies that are providing solutions to the challenges.

This objective is reflected in our results, with the EQ Future Leaders Portfolios presenting a 60% alignment, almost 25% more than the sustainable peer-group average. This is achieved in part through the intentional inclusion of sustainable thematic satellite themes, including climate solutions, clean water, digital security, green bonds, and healthcare. The SDG alignment has increased by 10% since the launch of the portfolios 3 years ago, reflecting our ambition to improve sustainability credentials over time.

The peers under comparison only display between 30-45% exposure to the UN SDGs. Based on our assessments of their investment processes, none has an intentional objective to align to the UN SDGs. Therefore, the existing exposure to UN SDG solutions companies is a coincidental outcome, mirroring similar levels of exposure to the market.

Intentionality to address climate risk and contribution

Measuring and monitoring portfolio carbon emissions is essential for assessing climate-related risks. To demonstrate the EQ Future Leaders’ intention to manage these risks and produce lower associated emissions than the benchmark, we show you the comparative carbon footprints below.

Source: MSCI, as of March 2023

As our assessment shows, most of the sustainable passive MPS have similar or higher carbon emission intensities. All currently present lower emissions compared to the global benchmark.

Although this snapshot of the EQ Futures Leaders Portfolios and its peers shows limited differentiation, we need to assess how this may change over time. The core of the EQ Future Leaders Portfolio is aligned to the 2015 Paris Climate Agreement in its intention and process, which means we can expect the low carbon leadership to continue over time. This is because the index methodology mandates a 7% reduction year-on-year in addition to a lower carbon footprint today.

All but one of our peers lack this explicit integration of Paris-aligned methodologies to their investment product selection.

Observations from underlying holdings X-ray

A full look at the underlying holdings within the funds held in the sustainable passive MPS reveals a high level of misalignment of screening methodologies. This results in negative exposures that would not be passable by the EQ Future Leaders strategy.

4/6 of the peers have exposure to businesses involved in oil and gas extraction (e.g., BP or Total), while 3/6 have exposure to businesses with thermal coal reserves (e.g. Glencore)
4/6 of the peers have exposure to gambling (e.g. 888 Holdings or Caesars Entertainment)
4/6 of the peers have exposure to military contracting (e.g. Lockheed Martin or BAE Systems)

In summary

As a dedicated sustainable DFM, we are driven to deliver a differentiated proposition that effectively and ambitiously meets your clients’ sustainability preferences while keeping costs low. The analysis presented in this blog today demonstrates that the EQ Future Leaders Portfolios’ sustainability ambition goes well beyond that of sustainable passive peers.

In these portfolios, the aim is to maximise sustainability credentials alongside keeping costs low and generating competitive risk-adjusted returns. To do this, we innovate, engage with managers to increase their ambitions, seek out new fund opportunities, and importantly back up all our research with in-depth due diligence on the underlying holdings to assure the screening processes actually deliver sustainable outcomes.