Hermes Investment Management, the £29.5billion manager, has published a report outlining how to deliver sustainable, risk adjusted returns.

Turning Down the Heat, focuses on the risks carbon poses to investment portfolios and offers solutions in four key areas.

Hermes Investment Management chief executive, Saker Nusseibeh, said the company considered it to be "crucial" to create the right outcomes from its investment decisions.

"The right outcomes are those that mitigate risk, including carbon risk because in 20 years, if circumstances don't change, we will already be approaching dangerous levels of warming."

"Reducing risk ensures better returns for our beneficiaries by minimizing potential expenditure incurred by negative factors later on – and gives us a better chance of leaving a better world to our children and grandchildren," he said.

The first area the report identifies is awareness of carbon risk exposure in investment portfolios.

It says the recent increase of the quality and quantity of data available, this is easier than it has been in the past.

The second area is integrating carbon risk investment decisions.

Nusseibeh says: "When we developed our carbon risk approach, we realised our portfolio managers already consider carbon risk through their wider awareness of risks and opportunities and often this approach is more implicit than explicit."

The report identifies managing and engaging to reduce carbon risk as the third priority, saying climate change is becoming an increasingly important issue to clients.

"We have seen growing interest from asset owners and a clear designer to see we are managing the risks around climate change," Nusseibeh said.

"When talking to companies, the first step is to establish what you want to achieve through your engagement – it is about maximising the value of each individual investment in order to provide the best circumstances for long-term returns."

The final area is advocating to promote market transformation, including sharing best practice.

"There is a prevalent view that the investment community sits somehow outside of what it invests in - but we are indigenous to the system.

"Carbon risk cannot and should not be ignored and it is time that we in the investment industry help to address it," Nusseibeh said.

First published 03.12.2015

Lindsay.sharman@wilmingtonplc.com