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SJP’s focus on carbon for passive range deemed ‘odd’

But excluding oil, autos, conventional power and airlines would lead to higher tracking error

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St James’s Place (SJP) is developing a range of low-carbon passive solutions, but industry participants have questioned why the range is just targeting carbon as part of a commitment to responsible investing more widely.

The plans, which SJP said are still in the development, are not the wealth manager’s first foray into passive but will enable it to better compete against the likes of US low-cost passive giant Vanguard, which announced earlier this year its intention to enter the UK advice space, and the Schroders and Lloyds Banking Group tie-up, Schroders Personal Wealth.

The low carbon range is slated to be launched over the next 12 months and will be overseen by SJP director of investments Rob Gardner, co-founder of pensions investment consultant Redington.

Gardner told UK newspaper the Financial Times the aim of the funds was to achieve a “trade-off” between a low-carbon footprint, low tracking error compared with the benchmark and low fees, but insisted it would not be a race to the bottom on charges.

“Ultimately, this is about client outcomes,” he said. “Our key focus is on creating high-capacity, low-carbon solutions as part of our broader commitment to responsible investing.”

‘Odd’ to focus solely on carbon

CWC Research managing director Clive Waller said it was “odd” the range is focusing on just carbon.

“Surely the issues are climate change, good governance, life cycle and supply chain management, diversity and so on? For the biggest wealth manager just to focus on carbon seems odd. Most major wealth managers are or will be developing ESG, sustainable and responsible investment strategies.”

But according to SJP’s annual report, the firm embeds ESG factors into manager selection and monitoring and portfolio construction processes for all its funds through a dedicated responsible investing team.

It said: “Our investment management approach takes ESG factors into account throughout the lifecycle of our clients’ investments.

“We factor ESG into our pre-investment process by assessing an investment manager’s approach to ESG, as well as building it into our post-investment assessment by reviewing an investment manager’s on-going monitoring and engagement process.”

The report also noted, according to its proprietary assessment process, 70% of its managers were rated ‘good’ or ‘excellent’ for their ESG processes in 2019, up from 33% in 2014.

Low tracking error limits

Seven Investment Management senior portfolio manager Peter Sleep said in relation to low-carbon portfolios, the omission of coal comes across as more of a marketing exclusion than an economic one given there are so few listed coal companies.

“As there are hardly any listed coal companies any more, this exclusion does not impact your tracking error or how you track the index,” he said.

Sleep added there are other exclusions that are more marketing than economic like controversial weapons, but not all weapons, and companies that have been sanctioned by the UN.

“The controversial weapons bumps out BAE in the UK for making scatter bombs and, I believe, VW in Germany has been sanctioned, but even then all these exclusions do not really have an impact on tracking error.”

Sleep added: “If you are serious about low carbon perhaps you could also exclude oil companies, car companies, conventional power companies, airlines and so on, but this would of course lead to very high tracking error and could impact the promoter commercially.”

Shift away from third-party active mandates

On an active basis, SJP does already have the St James’s Place Sustainable and Responsible Equity fund in its stable.

The fund, run by Impax Asset Management, looks to embrace the clean energy transition, advancement in healthcare technology and the mitigation of climate change.

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