The 8 stocks Martin Currie likes to play this irrepressible market theme

As noted above, Martin Currie Australia has been focusing on ESG for over a decade and has been making proprietary assessments on ESG, over that period as more and more research has shown that these characteristics can add value for investors.

Furthermore, focusing on these factors means avoiding investing in companies that Martin Currie Australia believes will be left behind.

For such an example, Baylis points to Whitehaven Coal (ASX: WHC) which only produces coal. As the world moves away from its coal dependency, companies providing solutions, such as renewable power generators like Meridian Energy (ASX: MEZ) and Contact Energy (ASX: CEN), may in Martin Currie Australia’s view, fare better over the longer term.

Whilst numerous funds focus on sustainability, one unique element of the Martin Currie Australia fund is the development of what it calls “carbon value at risk” – a way of marking down or marking up our assessments of the value of a company to the portfolio based on its carbon footprint.

“Furthermore, we combine the carbon value at risk with a value style philosophy, which is embedded in our investment team. We believe that we are one of the few sustainability- AND value-focussed funds in the market”.

"We are value investors at heart. We expect a positive, not a negative return to fair value based on discounted free cash flows. The attraction of this fund is you're still getting a value philosophy, while most Sustainable labelled funds invest using a growth style.

It appears to be good timing as well. We’ve all seen what has happened to growth over the past few years and Baylis thinks the current trend of normalisation will continue.

“BHP (ASX: BHP) have now been very public about scope three emissions, and that they are working very hard with steel companies to actually try and reduce their emissions, and even develop what they call long-term green steel, which means a reduced reliance on met-coal.

Baylis adds that BHP has set aside US$4 billion of shareholder capital that they're putting to work to focus on energy transition e.g. “green steel”, whilst “Fortescue (ASX: FMG) is even more extreme to the extent they're taking a lot of shareholder capital and putting it into Fortescue Future Industries”.

The second big trend Baylis identifies is the biodiversity trend. “A lot of companies now are thinking about what biodiversity policies they need and how they are going to measure biodiversity risk?”

Baylis points to Stockland (ASX: SGP) as a company that has thought about how it can enhance biodiversity when a new community needs to be built, particularly for first home buyers and immigrants.

The third trend is modern slavery. Martin Currie Australia has surveyed approximately 200 companies and collected a wealth of data on how they are addressing the risks of modern slavery. And whilst the term slavery may be a foreign concept, there are real-life examples at home.

“What's interesting in Australia is that there is a risk of modern slavery in contract labour in agriculture. Woolworths (ASX: WOW) and Coles (ASX: COL), which source fresh foods, have to be very mindful of who's picking the food”, says Baylis.

And finally, another trend we are all familiar with is getting plastic out of the supply chain and, in particular, supermarkets.

“Coles announced that they're now going to try and phase out the sale of plastic bags by 2030. When you and I are going to buy tomatoes, so often they’re wrapped in plastic. That's also got to be phased out”.

Baylis states the role of the fund “is very much targeted at people who are in the accumulation stage of their life rather than the retiring age of their life".

"The role of the Fund is that we aim to outperform the index. It's benchmarked against the S&P/ASX 200 but we are saying to investors that if you measure for material ESG risks, such as governance, carbon value at risk, biodiversity risks, and modern slavery risks and balance for the net benefits, we think that's going to add to your long-term expected return on stocks in the fund, and by definition, the portfolio”.

The fund typically holds 35-40 positions (36 at the time of discussion with Baylis) and has risk parameters that allow it to be plus or minus 6% index weight in any one stock, and plus or minus 11% in any one sector.

The fund benefits from not only Baylis and co-portfolio manager, Naomi Bant's wealth of experience, but the full might of the Martin Currie Australia team.

The Martin Currie Sustainable Equity Fund (the Fund) is designed to serve investors who are seeking to maximise returns over the longer term. The Fund invests in companies that have been assessed using MCA’s proprietary “Active Ownership” approach and ratings framework to have more favourable assessments for “Sustainability Risk”, “Net Benefits” and “Sustainability Pathway” and “Shadow Carbon Cost”.