WillisTowersWatson (WTW) believes that ESG (and more broadly sustainability) related issues should be integrated into all parts of the investment process, including asset allocation and portfolio construction. WTW’s investment process aims to create portfolios of the highest quality as evaluated through a number of ‘lenses’, including sustainability. This helps to build robust, diversified portfolios to meet our clients’ risk and return requirements.
Sustainable investment is incorporated into WTW’s investment process through a number of avenues. The framework for doing this is to assess sustainability principally through two dimensions:
• Overall Portfolio Resilience: Exposure of the portfolio to sustainability-related risks and opportunities
• Underlying Manager Resilience: The extent to which, and success with which, sustainability is incorporated into the decisions made by managers in the portfolio
We have identified climate change as a critical and systemic priority, given the risk it presents to our clients’ investments, the ongoing resilience of the savings universe, and the planet as a whole. Therefore climate change is a key focus in portfolio construction – understanding risk exposures and reducing them through time, as well as identifying and investing effectively in the opportunities. This occurs both through top-down identification and analysis, as well as the bottom-up analysis.
In order to assist our portfolio construction process, we draw on a number of portfolio tools, the majority of which have been developed and tailored in-house to best align with our approach to building portfolios. Some of these tools are outlined below:
• Portfolio resilience scoring: Aggregating security-level ESG data to indicate the total exposure of a portfolio (or parts of a portfolio) to a wide range of sustainability issues
• Scenario analysis: Used to stress-test portfolios, including for example on realistic global emissions pathways to assess portfolio quality in the face of various climate change scenarios
• Physical risk mapping: Using location data to assess assets’ exposure to a range of physical risks and perils under a variety of climate change scenarios
• Thematic risk and opportunity exposure: Identifying key trends and sub-trends with outsized risks and opportunities, and mapping
portfolios to minimise exposure to the former and maximise exposure to the latter
These tools are combined within our overall portfolio construction tool which assesses all the lenses of portfolio quality that we consider, and allows us to advise our clients to build portfolios that weigh these lenses appropriately according to their investment beliefs, market conditions and client contexts.