Sustainable investing themes of ‘climate’ and ‘carbon reduction’ gaining favour among fund investors

Investors should channel money into growth sectors such as education, health and clean energy if they choose to withdraw from companies scoring poorly on environment, social and governance issues, according to experts in sustainable investment. 

This way, they can not only cut downside exposure to companies that flout environmental rules, have dubious labour practises and lack board diversity, but also gain from growth opportunities in those that tap unmet demand for better living and a reduction in social inequality through education and health care.     

“If clients want to exclude from their portfolios companies producing weapons, tobacco and alcohol for moral and ethical reasons, I would explain to them that it will result in certain distortion to [the risk-return profile of] their portfolios,” Hermes Investment Management head of sustainable investing Andrew Parry said. 

“To compensate, I would encourage them to substitute stocks in consumer staples that can provide similarly strong cash flow and dividends.” 

London-based Hermes manages 33 billion pounds (US$45.5 billion) of assets and claims to have one of the world's largest corporate stewardship operations, advising clients on governance issues who own some US$450 billion worth of assets.

Asia outside Japan saw US$52.1 billion of funds managed with sustainable investment strategies in 2016, up 16 per cent from 2014, according to a report by the Global Sustainable Investment Alliance.