He says: “One of the mistakes people make is to invest in a ‘leaders fund’, that is, a strategy which owns only the most sustainable equities. If you do that, you will probably end up with a lot of exposure to tech. So investing in a fund that takes a broader view can help reduce that.”
Kate Rogers, head of sustainability at Cazenove Capital, says: “Most sustainable investors seek to avoid harm, by removing companies such as tobacco or oil companies and underweighting sectors like banks (that finance fossil fuel projects). Unchecked, this does tend to tilt portfolios towards growth and quality styles, with many sustainable ETFs over-concentrated in large tech names.
"This is why active management is essential; to ensure portfolio construction is based on active decisions rather than momentum driven – we want to hold stakes in good companies that are also good investments. [We have] exposure to quality, through a core allocation to ‘sustainable leaders’ for the long-term, who are considering all their stakeholders.
"We also allocate to thematic and impact managers that offer strong diversification properties and positive impact. These funds invest in businesses contributing to environmental and social solutions. As a result, these managers tend to have a bias towards small and medium-sized growth businesses. Diversification is also achieved through allocations to other assets like social housing, renewable energy, energy storage, social and green bonds, and sustainable infrastructure.”
Bonds and sustainability
A key debate among market participants in recent years has been around whether bonds issued by governments should be included in sustainable portfolios given that almost all governments spend money on armies.
This is a key consideration for those who have diversification as a priority, as government bonds typically perform well when equities perform poorly, creating a natural diversification.
Emery says he does include sovereign debt in portfolios, and assigns countries a sustainability rating based on a letter of the alphabet, similar to the way countries are assigned a credit rating. This way, he says, he can obtain the diversification provided by sovereign debt, while also complying with sustainability criteria.
Eren Osman, co-chief investment officer at Arbuthnot Latham, says that from a fixed income perspective, it is difficult to build an allocation to corporate bonds that is both sustainable and diversified, as the companies issuing bonds that meet both criteria tend to operate in a small number of sectors.
He is happy to allocate to government bonds, particularly UK government bonds, as this is “home market” for most of his clients.
