Loyalty to Clients in Ethical Investment Decisions

As an asset manager, you have recently been approached by a potential client, a large pension fund, looking for a portfolio manager to oversee their emerging markets equities allocation. After several discussions, the client expresses specific preferences regarding ethical investments and high ESG (Environmental, Social, and Governance) standards. However, you have a considerable position in an emerging market company facing allegations of poor labor practices and environmental violations, which could generate significant short-term returns.

According to the CFA Institute Asset Manager Code of Professional Conduct, particularly the principle of 'Loyalty to Clients', discuss how you should approach the situation. Address the ethical considerations, your responsibility towards your current investments, and the need to align with the client's values. How do you ensure that your loyalty remains with the client while also considering your existing portfolio? Provide a comprehensive analysis of how you would balance these competing interests and the potential implications of your decision for both the client and your firm.