It is not enough for portfolio holdings to simply be "good citizens" to be considered for inclusion in the £1.6bn Pictet Global Environmental Opportunities fund, according to its manager Luciano Diana, who said they must offer a technology-driven solution before an investment is made.
The strategy, which has been in place since October 2014, sees the manager invest in companies with business models that provide a solution for one of two types of issues: either natural resource efficiency, or environmental quality and pollution control.
The manager said: "It is not enough to be good citizens, it is not enough to have a good ESG profile, so to speak. These companies also need to offer something and that is why we operate from a relatively narrow investment universe."
In the past quarter, Diana made one addition to the portfolio which was German company Infineon, with 1%-2% allocated to the stock.
"In Infineon's case, we know they have a strong business franchise for power semiconductors," he explained.
"And also we have had a pretty good opinion of management. But we thought the valuation was right last quarter to initiate the position."
While the manager does not apply any exclusions to countries or regions, he currently has no exposure to India in the fund, noting "we would like to, but we struggle to find direct and indirect plays on that country".
The fund's largest exposure by geography is the US, which accounts for 57.4%, a percentage that "has been quite high throughout the history of the fund", followed by Europe.
Diana added: "What we are interested in is the indirect exposure to emerging markets. We know that is where most of the environmental problems are.
"Instead of investing directly, we prefer to find those American or European companies that have a sizeable business in China, or southeast Asia."
He cited US-based holding Agilent as an example, which specialises in environmental monitoring and has more than 25% of its sales in China.
"Because China needs a lot of their equipment to first understand what kind of issues they have in terms of environmental clean-up before they can act on that," added Diana.
The fund has returned 27.5% over one year to 3 February 2020, against the IA Global sector average of 15.7%, according to FE fundinfo, and has outperformed both the sector and its benchmark MSCI World index over three and five years.
Diana said software companies had contributed to performance.
"These businesses are extremely robust, with very high margins, very high returns on capital, they are growing and, therefore, these stocks have done extremely well over the last few years and they have also explained quite a lot of the performance of our fund," he said.
He added an important change "has been that early definitions of what was environmental were too narrow", and recalled that ten to 15 years ago it was "just about renewable energy".
Diana explained: "From a performance standpoint, sometimes having those narrow definitions would lead to a lot of volatility and also sometimes not necessarily strong business models."