An Alternative Approach to US/UK Tax Efficient ESG Investment

Written by Cormac Naughten

MASECO Institutional is the arm of MASECO LLP that acts as a discretionary investment manager (“DFM”) for US connected clients. Over the last twelve months in my role as Head of MASECO Institutional I have noticed a substantial increase in the number of advisers contacting me to enquire about Socially Responsible (“SRI”), ethical or sustainable portfolios which could all be grouped under the general industry term of “ESG” or investment focused on Environmental, Social and corporate Governance considerations. By investing in this way clients look to combine investing for a financial return with a positive contribution to the environment and/or society, whilst rewarding companies with positive corporate behaviours or governance and showing their disapprobation for firms that do not reflect these values.

Why is this? There has been much greater coverage in both the investment and adviser industry trade press and the wider financial press. If the sole measure of the number of new ESG inspired products available was the volume of spam email I get on the subject, then this has certainly rocketed! Indeed, Bloomberg noted in one of their own blogs back in February that the US ESG market for exchange trade funds (ETFs) alone had risen by over 318% in 2020.

This points to what I believe is the likeliest reason – that advisers are ultimately led by their clients’ wishes and this is what clients are increasingly wanting. Although there are probably more conversations nowadays between advisers and clients as to whether they have preferences for ESG considerations when investing which creates a virtuous circle, the actual decision rests with the client.

Previously my discussions with advisers on this subject were often focused on very specific enquiries regarding clients with strong ethical positions or a desire for a conscience/conviction led investment approach which excluded particular industries such as “sin” stocks (for examples companies with links to the alcohol, gambling, tobacco or adult film industries). An added complication was that in order to be tax efficient, US taxpayers need to invest in either individual stocks and bonds or US funds with UK reporting status. Historically there have been a limited number of such US funds, let alone those that could satisfy ethical restrictions which frequently varied client by client. This left many clients investing by default in portfolios composed of individual stocks and bonds as this route enabled the wealth manager to exclude certain industries, sectors or particular companies.

A consequence of this is that I am now seeing more and more of what could be described as “buyer remorse” from clients who have invested in ethical portfolios which have excluded not only companies in the aforementioned “sin” industries and other controversial areas, such as armaments manufacture, but many others with only tangential connections to them. It seems, in some instances clients were unaware of all the implications of investing in several dozen individual stocks and bonds. This investment approach has created long term implications, such as leaving them concentrated in a few industries like IT or finance and frequently within individual markets such as the UK with little or no international diversification. In turn, these clients were disappointed that their portfolios‘ returns have little resemblance to what they considered to be the “market” return even though they might be extrapolating from the returns of the US S&P 500 index despite having a predominantly sterling based portfolio in UK stocks when the FTSE 100 was a more appropriate benchmark.

A frequent rejoinder from such clients is that they want to feel that they are doing the right thing by investing in a way that reflects their values whilst still aiming to receive a return that is not too far away from the market or index return.

This is what the MASECO approach to sustainable investing aims to deliver using low-cost funds or ETFs to achieve wide geographic and sector diversification with thousands rather than dozens of securities. This can be done whilst maintaining US/UK tax efficiency and using a quantitative and coherent methodology rather than judgements as to what is, or is not, “ethical”.

This approach seems to resonate with many clients as does the fact that MASECO has been a B Corp or Benefit Corporation since December 2013 – the first UK financial services firm to have been awarded this certification. This is a concept that originated in the US and involves companies signing up to meet certain measures of sustainability and ethical behaviour in the way they are run, with the aim of creating “general public benefit” while at the same time permitting them to generate reasonable profits for their owners. The accreditation process ensures that companies do not just aspire to do good whilst doing well, but have incorporated within the fabric of how the business operates the basic tenet that companies can reflect the values of their people and be a force for a positive change in the world.

Clients and advisers can also view MASECO’s annual B Corp impact report which allows them to measure the impact of MASECO being a B Corp in a quantifiable way. It has also led other advisory firms to ask us how they can become a B Corp themselves which is something that my colleague George King has been happy to assist them with.

Our approach to sustainable investing is not for everyone.  However, it does offer an alternative approach to ESG investing designed specifically with US taxpayers in mind who wish to feel that they are doing the right thing whilst still trying to achieve a commensurate market return.

Important information

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Use of information:
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