With a growing number of investors aiming to align their investments with their personal ethics, the amount of assets under management (AUM) held in sustainable funds has steadily increased over the years.
A number of different strategies have also been launched in more recent years to meet the demand for ethical, social and governance (ESG) style.
ESG funds under management and as a proportion of total
Source: The Investment Association
ESG funds employ a range of strategies to lower or limit their environmental impact, including evaluation of climate and carbon-related risks, screening out stocks that harm the environment or investing in companies that deploy cutting-edge technologies to support change.
Below, Hermes’ Louise Dudley, Trium’s Chad Slater and Nordea’s Thomas Sørensen and Henning Padberg highlight the benefits of sustainable investing and discuss what has made their strategies effective.
Be aware of emerging issues
For Louise Dudley, global equities portfolio manager at Hermes Investment Management, transition to a low-carbon economy is driving innovation through research, development and the adoption of new tools for change.
However, as innovation grows, so does the need for further research analysis and evaluation of climate and carbon-related risks, said Dudley, a reason why she highlights the importance of being aware of emerging issues.
“One area that needs further research is the financial risk associated with carbon pricing models,” Dudley noted. “This hinges on a company’s carbon efficiency, geographic location of operations, business model, and market conditions sector-wide.”
“Moreover, a company’s business model and broader market conditions will also dictate whether companies are able to absorb the increased costs related to carbon pricing models or pass them on to their customers,” she added.
With that in mind, the manager of the $22.2m Hermes Global Equity ESG fund said the team is currently expanding the work they already carry out.
“We are evaluating the usefulness of analysing financial risk in carbon pricing models,” the Hermes manager explained.
“And, as we seek to drive long-term progress towards a low-carbon future, we will continue to step up our response to climate change to better understand the scale of carbon-related risks and opportunities.”
View climate as a piece of a broader puzzle
According to Thomas Sørensen and Henning Padberg, managers of the Nordea 1 Global Climate and Environment fund, the climate and environment trend has never been so strong.
This can be seen in the commitment of almost all countries in the world to COP22 – the United Nations Climate Change Conference – which, the pair said shows “society wants change”. 
The growing willingness across every element of society to contribute proactively to a more efficient and sustainable world, is another sign people are increasingly concerned about climate and environment issues, they said.
“Innovative products and services we thought only belonged to sci-fi are already part of our lives,” said the managers of the five FE crown-rated Nordea 1 Global Climate and Environment fund.
A good example of the integration of these products and service, which can be seen in smart cities.
“Integrating technology and intelligent connectivity to solve real-life issues – such as traffic, energy and water distribution – improves our quality of life and helps cities manage resources more efficiently,” said Sørensen and Padberg.
“Companies in the areas of energy efficiency, smart grid, advanced materials and intelligent construction are deploying cutting-edge technologies to support this change.”
While the climate and environment scene before the global financial crisis was mainly driven by politics and the focus was in areas such as subsidies and regulation, the managers noted that today economics dominates, another reason why climate should be seen as part of the broader picture.
“Investing in climate solutions is a rational decision for consumers and enterprises,” they explained.
“The economic incentive, where it makes economic sense for both consumers and corporates to invest in climate solutions, has clearly reached an inflection point.”
The pair added: “Companies understand improving sustainability is vital to remaining competitive in today’s world.”
Offer the carrot and the stick
Chad Slater, portfolio manager of the Trium Morphic ESG L/S fund, said there is an increasing number of people who want to change their previous investment behaviour.
“There is a saying that ‘markets are made at the margin’. That is the incremental change that drives the direction of the market,” he said.
“If I look at the world today, the incremental change is in the direction of people wanting to change their prior behaviour.”
Slater said: “One way that people can have an impact is to align their investments with their personal beliefs.”
Whilst some would argue capitalism and the profit-generating mentality that turns a blind eye on environmental issues is the cause of the problem, Slater believes capitalism offers “the next step beyond civic action”.
“The role of capitalism is to allocate capital to those businesses that are ‘better’ and remove it from those that are ‘worse’,” he said.
“By investing with managers who support the former, investors can fund businesses that reduce emissions or create biodegradable plastic alternatives.
“But people can also work to raise the cost of capital of the incumbent industries that are creating the problem. It’s the other leg to a sustainable strategy.”
As such, Slater’s way to align his investments with his personal beliefs is to short stocks that are harming the environment.
“We believe as more and more people change their behaviour, this will flow through to falling profits for these unsustainable businesses,” he added. “Thus, our investors will have both made the world a better place and profited from it at the same time.”