Most asset classes evolve in quite the same way.
Initially funds with broad mandates are created and, if the asset class proves popular with clients, then funds aimed at investing in just a portion of the market – for example, a smaller companies fund – as investors' understanding of the asset class grows.
While sustainable investment funds have been around for many years, the same pace of innovation has arguably yet to occur.
This is particularly noticeable if one looks at the factor exposure involved. The sectors that many sustainable investors favour include electric vehicles and renewable energy, firmly in the 'growth stock' camp, potentially leaving investors overly-exposed to one style of investing.
Shaniel Ramjee, multi-asset investor at Pictet AM, says: “If you take a blunt view of what a 'sustainable investment' is right now, then you are going to end up with a massive exposure to growth stocks. But we think the next phase is going to be more nuanced.
"Capital will flow to the areas of the economy where the greatest change needs to happen and that is the energy sector, and helping the companies that are transitioning from fossil fuels to renewable energy is part of that. It has to be part of it if we are going to achieve the climate targets we need to.”
While the evolution of asset classes is typically driven by active fund houses, Fahad Hassan, chief investment officer at Albermarle Street Partners, says: “If an investor wants to avoid having too much exposure to growth in a sustainable investment portfolio, the best approach available right now might be to own a passive fund.
"Because they have the broadest possible exposure to an asset class, it should mean they minimise the exposure to any one investment style.”
Simon Holmes, multi-asset investor on the Universal fund range at Columbia Threadneedle, says: “The key to the evolution of sustainable investing, the same as it was with every other asset class, will be an increase in the quantity and quality of data available. As we get more data, more styles and ways of investing will emerge."
He adds: "One of the new themes we are looking at right now is companies that help other companies be more sustainable. For example food supplements for cows, which lowers agricultural emissions, or recycling businesses that work with electric car companies.
"Those sorts of businesses have basically evolved in response to the challenges we have begun to understand in more recent years.”
Data can help create more 'S' funds
Kevin Thozet, multi-asset investor at Carmignac, agrees that data is an issue. He says ample data exists around climate issues, which is why so many funds focused on the environment – the E in ESG – exist.