Dealing with risk
In terms of how to deal with the risks of being overly exposed to the growth style of investing, she says: "There are some value funds out there which have a sustainable approach, there aren’t many but I think we found some; it's the same on the bond side, we use three bond funds, but we were delighted to find them, it took a lot of looking to find them."
One thing investors should not do, according to Neil Birrell, chief investment officer at Premier Miton, is sharply alter their usual asset allocation decisions in order to accommodate their sustainability criteria, saying he feels this is not necessary.
He says: “Investing in a sustainable business does not inherently increase financial risk; indeed, proponents of the strategy will argue that over the long term, it can reduce risk and enhance potential returns. There are many factors that drive risk and return of share prices, sustainability is only one of them.
"Nonetheless, building a portfolio like this does mean that it is less diversified and in certain market conditions that can have a detrimental effect. However, if staying solely with equities, you can diversify by geography, sector and market capitalisation and more particularly by sustainable themes such as circular economy, financial inclusion or health and wellbeing, among others. These are exposed to different short and long-term influences."
This is a view echoed by Simon King, chief investment officer at Vermeer Partners, who says: “We try to think about portfolio construction in exactly the same way for any client. We incorporate ESG considerations at the stock selection level. At the asset allocation level it is about trying to find other investments to replicate the areas that ESG considerations prevent us from investing in, for example the income and low cyclicality of tobaccos or the diversification benefits of oil and mining etc.
"The temptation is to replace the income with high-yield fixed income or high-yielding rubbish, both of which we try to avoid. Where allowed we look to find other areas that may benefit from the possible success of the areas we are precluded from, eg oil and mining services as a proxy for primary producers.
"We are very wary of the ESG darling stocks, which until recently had commanded unsustainably high valuations."
The topic of meme stocks is one which preoccupies Deirdre Cooper, co-head of thematic equity at Ninety One, who says an approach based on ESG ratings as provided by external agencies is one that can lead to an over exposure to just one factor, but this is less the case if one invests in companies that look at a broader range of considerations than just climate risk, for example.
