When is an exposure to tobacco, an exposure to tobacco?

This is the issue which Stuart Clark and the Wealthselect team at Quilter have recently been debating.

They recently decided to disinvest entirely from the Ubam Positive Impact Emerging Markets fund - a fund which made up 2.71 per cent of the Quilter Wealthselect Sustainable's balanced portfolio and 5 per cent of that range's most adventurous portfolio. In both instances it is the portfolio's only emerging market exposure.

Quilter tells us the reason they called time on the Ubam fund was because its third party data provider identified tobacco production, in the form of e-cigarette production, through a joint venture of a holding in the fund. 

Union Bancaire Privée, the Swiss wealth management firm which runs the fund, confirmed the fund held BYD, a major contributor to energy transition in China. The company specialises in producing electric vehicles, but through a subsidiary is also a supplier of components to a company selling heated tobacco products, which makes up less than 0.5 per cent of the company’s business.

According to Quilter it was told revenue for that holding had ceased, but its investigation found there was not enough evidence to over-ride its policy for its sustainable portfolios.

For UBP's part, it says its impact team engaged with the company in question earlier this year and conducted further research. It felt this did not constitute a direct exposure to tobacco, as validated by external data and internal research, and did not breach UBP’s policy. It therefore stayed invested in the company and shared the additional information with its ESG data provider, which also said it did not consider this to constitute an exposure to tobacco.

But a Quilter spokesman said: "As a multi-manager we feel it is of utmost importance that we independently monitor adherence to the objectives we have laid out to our clients and take appropriate action if necessary."

UBP has been fairly sanguine in its reaction to Quilter's decision to pull its assets completely from the £394mn fund.

Mathieu Nègre, the fund's manager, said: "UBP recognizes that clients and other data providers can and often do reach different conclusions in borderline situations like this one, and respects their opinion. Maintaining an open dialogue with stakeholders on any controversy that inevitably affects an investment portfolio is an integral part of UBP’s process.

"UBP will continue to engage with the underlying portfolio holding on this and other issues relevant to their business."

It is certainly the case that Quilter's Wealthselect Sustainable portfolio range has a high bar: the portfolios seek to invest in line with the UN Sustainable Development Goals (the Quilter Wealthselect Responsible range, by comparison, seeks to maintain a smaller carbon footprint than its reference index).

But this is an interesting tale of the trials and tribulations of running an ESG portfolio, particularly with exposure to emerging markets.

We suspect this is the reason the two biggest emerging market funds in our data base are passive: iShares MSCI Emerging Market SRI and Vanguard ESG Emerging Market All Cap Equity Index.