Emerging markets
Ms Davidson prefers to look to emerging markets.
She says: “MSCI’s [environmental, social and governance] ratings favour European equities and large-caps primarily due to better disclosure, but this doesn’t necessarily reflect reality.
“For example, people perceive emerging markets to have lower standards when it comes to ESG, but what we have found is that disclosure is lower because there are fewer legal requirements, but many companies are just as well, or better, run.”
Mike Fox, global sustainable equity fund manager at Royal London, says: “Looking for sustainable investments in emerging markets means doing the opposite of what a global equity manager might do in developed markets.
“In emerging markets we find that governance has improved over the years, albeit from a very low base.
“We think the companies to focus on are those where the managers of the companies have large personal shareholdings, now outside of the emerging markets, that might be viewed as a negative, but in emerging markets it is positive, and central to how we get our exposure there.”
Diversifying your portfolio
David Winborne, equity fund manager at Impax, says the only way to achieve a truly diversified portfolio is to move away from a focus on benchmarks, such as the MSCI, and from any rigid focus on a particular style of investing.
In terms of investment style, Ms Davidson says: “While I think a sustainable portfolio can be well-diversified in most regards, it will tend to tilt towards quality stocks.
“Given the universe of truly sustainable companies is small, in my view, it is difficult to think of how one could make a portfolio of really sustainable value stocks.”
Mr Bonthron of Kames is another investor who sees opportunities in emerging markets.
He says at present it is difficult to see how the deep value style of investing could thrive in the present world of sustainable investing.
This is because some stocks are priced relatively highly, so are not cheap in a way that would appeal to value investors, while other companies, which he calls ‘emerging businesses’, are growing quickly and so do not really fit the criteria for a value investor either.
David Harrison, global sustainable equity fund manager at Rathbones, says there are about 3,000 stocks in the world he can look at, even after he has eliminated the companies that fail the initial screening for not meeting the criteria.
He says those 3,000 stocks comprise 80 per cent of the global equity market, and from those, about 30 are selected as meeting the criteria for investment, and placed into his fund, after a second screen is carried out to ensure it meets the sustainability goals of the fund.
