Technology stocks are an increasingly uneasy fit in sustainable fund portfolios, due to the associated environmental, social and governance (ESG) risks – from greenhouse gas emissions to data privacy concerns and use in weaponry. Yet many sustainable funds remain invested in the sector.
While it has been a profitable trade, particularly since the AI boom of 2023, questions are starting to be asked by investors as to whether the sector warrants a place in sustainable funds.
Having previously spoken to institutional investors about how they navigate the murky area of technology, below Trustnet spoke to fund managers about how they invest in an increasingly ‘grey’ area.
All in favour
At a fund level, the tech and AI tilt is hard to miss. The £1.7bn Janus Henderson Global Sustainable Equity fund holds 35.1% of assets in the information technology sector compared to the 25.1% sector weighting in the MSCI World index.
Hamish Chamberlayne, co-manager of the fund, argued that technology is necessary for promoting sustainability in the future economy.
“If we accept the pursuit of growth and abundance as societal imperatives then the technology sector is one that cannot be ignored,” he said.
He acknowledged that sustainable fund managers must nonetheless be selective, adding “we are deliberate in the technology companies we avoid”.
The Janus Henderson fund is far from alone in buying into tech. The £1.2bn Baillie Gifford Positive Change fund has a 2.6 percentage point overweight in the information technology sector versus its MSCI ACWI benchmark. Its biggest position is a 9.7% stake in TSMC.
Kate Fox, co-manager of the fund, said many portfolio companies rely on “critical enabling technologies” provided by semiconductors and digital connectivity to become more sustainable.
As an example, she said ASML’s lithography technology is enabling smaller, more powerful and more affordable semiconductor chips, which are making key technologies, like mobile internet, more accessible for people around the world.
“This connectivity is vital for the likes of [portfolio holding] MercadoLibre, which facilitates entrepreneurship and financial inclusion through its e-commerce and fintech platforms in Latin America,” Fox said.
Similarly, she said another portfolio holding – Microsoft – is driving positive impact through its deployment of AI.
“It is improving access to, and education around, essential technologies, notably in emerging markets,” Fox said.
“Meanwhile, its cloud infrastructure is helping SMEs to innovate and scale their businesses. These functions are key in enabling digitalisation and driving wider change across society.”
Engaging and screening
Sustainable fund managers speaking to Trustnet stressed that their inclusion of tech stocks is never driven by financial performance alone, with engagement and ESG screening central to every investment decision.
The £122.8m Abrdn Global Sustainable Equity fund is another with big tech holdings, listing Microsoft (5.6%), Alphabet (5.6%), TSMC (4.8%) and Nvidia (4.8%) as its top positions.
Sarah Norris, head of ESG equities at Aberdeen, noted there are examples of tech companies with “outstanding” ESG risk management – such as addressing gender or ethnicity pay gaps.
As such, she emphasised the importance of engaging directly with prospective portfolio holdings to better understand their management of ESG-related risks.
“For example, we engaged heavily with Alphabet in 2023 and 2024 around its carbon management and board composition,” Norris said, noting that improvements in both “prompted our initiation in early 2024”.
“We ultimately look to overweight those technology companies where astute risk management of key risks is paired with growing earnings, strong balance sheets and sensible capital allocation,” she said.
Alongside engagement, fund managers of sustainable funds also apply an extra layer of due diligence to inform their investment decision-making.
David Harrison, fund manager of Rathbone Greenbank Global Sustainability, said the fund has an independent ethical research team that screens all stocks before they can own them.
“We do not own a number of well-known technology companies for that very reason,” he said, noting that the fund currently holds Microsoft (4.6%), Nvidia (4.2%), ASML (4%) and TSMC (2.7%).
“In each case, we have looked at a range of ESG factors including supply chain management, end market exposure, the level of management transparency and how the business fits with our sustainability framework.”
He said all these businesses remain “fundamentally attractive and are likely to be key contributors to positive technological change across multiple industries”.
Digging through the value chain
Other sustainable managers are turning to the wider AI value chain, seeking companies that benefit from the technology’s growth while better aligning with their environmental and social criteria.
For example, Martin Frandsen, manager of Principal GIF Global Sustainable Equity, said his main focus is to invest in companies across the AI value chain that deliver value-generating solutions to the associated risks.
The fund is overweight the tech sector versus its benchmark – the MSCI World index – but big AI names including Broadcom, TSMC, Amazon, Alphabet and Apple are some of the portfolios biggest underweights.
Instead, it carries overweights to notable energy providers, such as SSE and NextEra Energy, which each have decarbonisation commitments and are investing in scaling clean energy.
“One of the key parameters of competitiveness for tech companies will be compute power and the cost of delivering that – a big part of that cost is electricity,” Frandsen said.
“That links directly to renewable energy. You have high upfront costs, which are easier for [these companies] to handle, and then very cheap energy for the life of the asset.”
Goldman Sachs research suggests that data centres are set to consume 165% more electricity by the end of this decade than they did in 2023.
On the social side, Frandsen acknowledged core AI-related risks such as loss of jobs and bias. “There are specific tech companies we have avoided because we weren’t comfortable with social or governance issues,” he said.
Ultimately, the picture that emerges is not one of abandoning the technology sector but of managers reshaping exposure to ensure AI’s growth is captured in ways that better reflect sustainable funds’ environmental and social ambitions.
This is the second part of a two-part series. Part one can be found here.