Tilting toward better outcomes: Different approaches for different client needs

Different ESG approaches serve different client needs. Some investors prioritise higher levels of exclusion to reflect specific values or policy requirements. Others want strategies that remain close to the benchmark, while still incorporating ESG characteristics. Our Tilt strategies are designed for those in the second camp.

Exclusion is simple. That is part of its appeal.

For some clients, significant exclusions are entirely appropriate. They reflect genuine values, respond to policy constraints, or satisfy specific mandates. But for others – particularly those using equities as a core allocation – heavy exclusions can create a problem: they raise tracking error, increase turnover, reduce diversification and introduce unintended factor biases. This matters because a strategy that drifts significantly from the benchmark may be difficult to hold as a core building block in portfolios, however strong its ESG credentials.

At the same time, climate investing is about the real economy. And climate change will not be solved by owning only software companies and healthcare names. If the objective is to support transition in the economy itself, the issue becomes more complicated. Heavy industry, utilities, transport, mining and energy all sit inside the transition story. Indeed, entire sectors do not decarbonise simply because responsible investors walk away. Instead, they decarbonise when capital, engagement, good governance practices and corporate strategy all point in a new direction.

How Tilts work

Our Tilt strategies are deliberately designed for clients who want ESG improvements alongside benchmark-like outcomes. Within this framework, we apply a firm-wide good governance lens and we minimise exclusions to avoid large active-risk positions away from the benchmark – though we do retain exclusions in selected areas, such as controversial weapons and high thermal-coal exposure, where our convictions are clear.

Within the Tilt strategies, rather than making large, concentrated bets or removing companies entirely, the process overweights those demonstrating ESG leadership and underweights those that do not, stock by stock across the entire index. The effect of any single adjustment is modest, but applied across hundreds of holdings, the cumulative impact on a portfolio’s ESG profile can be material.

Within this framework, our process tries to identify which companies within transition-critical sectors are adapting, investing and governing for a lower-carbon future – and which are not.

This approach requires a more nuanced assessment. By design, Tilt portfolios may retain exposure to challenging sectors, because that is where some of the most important decarbonisation work still needs to happen. At Royal London Asset Management, we take an engagement over divestment approach allowing us to try to influence company behaviour, encourage improved practices, and support long-term value creation for our clients.

Three reasons this approach may suit certain clients

First, for clients whose objective is to influence real-world decarbonisation, retaining exposure to transition-critical sectors may matter. We know the transition is sector-wide, uneven and messy. There are leaders and laggards, and there are companies that, although perceived as laggards today, are actively working to improve.

A Tilted approach allows investors to remain invested in those stories – and to use ownership, governance pressure and voting rights to support their journey. This will not be the right approach for every client. However, for those who want their capital to support the transition in the real economy, it can offer meaningful advantages.

Second, it may give investors more leverage. Ownership, engagement and voting are tools we can utilise as a firm. We vote on each company in the fund and our centralised RI team undertake engagement with companies which may be held in the fund.  ESG considerations are also reflected through our assessment of companies’ emissions profiles and their capacity to adapt over time.

Third, for clients who need a core equity building block, the Tilt approach is designed to remain usable. By minimising exclusions, the strategies maintain broad market exposure, keep tracking error low and avoid the sector and factor biases that can accompany more exclusion-heavy approaches.

The result is a strategy that can sit at the heart of an institutional portfolio, aiming to improve the funds ESG characteristics without materially changing the portfolio’s risk and return profile relative to the benchmark.

The broader point is that there is no single “right” approach to sustainable investing. Different clients have different objectives, constraints and definitions of what a responsible portfolio looks like. Our Tilt strategies are designed for a specific and important part of that spectrum: clients who want genuine ESG improvement alongside benchmark-like outcomes. Understanding that fit – and being clear about who each approach is designed to serve – is ultimately what makes responsible investing work in practice.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.