Sustainable Funds: Common Strategies

By Alex Aleksic

Sustainable funds have seen a surge in popularity in the last five years

Common strategies and keywords to know when looking through sustainable funds

Why investors should be aware of these various strategies

The rise in sustainable funds

Sustainable funds are funds that target sustainable development-related themes or integrate sustainability factors into their selections and, like other measures towards sustainability, have been rising in popularity in recent years. The United Nations Conference on Trade and Development (UNCTAD) published a study a few months ago highlighting the recent rise in sustainable funds over the last five years. In the study, they found that the number of sustainable investment funds have almost doubled in the last five years, reaching 3,987 by June 2020, with assets under management (AUM) of over $1.7 trillion, just over 3% of the assets of the world’s open-ended funds. In the last two years alone, the momentum of sustainable funds grew by over 50% in 2019 and doubled in 2020 (in terms of AuM). Due to risks posed by climate change, and the desire to pre-empt the impact of sustainability-related regulations, institutional investors are increasingly embracing sustainability in their operations.

Common strategies used for sustainable funds

While many institutional investors are familiar with the term like ‘ESG’ or ‘SRI’, which refer to investment strategies that are socially responsible and sustainable, there are even more specific strategies fund managers may utilize when managing a sustainable fund. Some of the more common ones include negative/exclusionary screenings, and best in class.

Negative/exclusionary screening excludes companies that are classified as unsustainable according to certain criteria (which can vary from fund to fund). Best in class refers to a specific investment strategy that involves investing in the companies that are considered the leaders in their sector in terms of meeting ESG criteria. However, other strategies are also used in sustainable funds, such as:

Norms-based: Screening of investments against the minimum standards of business practice based on international norms
Best effort: Investment in sectors or companies selected for positive ESG commitment relative to industry peers (different from best in class which is performance-based rather than commitment based)
Themed investing: Investment in themes or assets specifically related to sustainability
Impact investing: Investments made with the intention of generating social and environmental impact alongside a financial return.

Each fund’s sustainability metric will be different, and there are various methods used when it comes to constructing a sustainable fund. Most funds, however, will mention utilizing ESG factors or other sustainability metrics in their prospectus or website.

Importance of knowing strategies

No one strategy is necessarily superior to the other, as all have the goal of making funds more sustainable in the long run. It is good to be aware, however, since investors may become overwhelmed with the sheer amount of varying strategies funds may utilize in their sustainable investments. At the end of the day, it’s up to the individual investor to decide which strategy aligns best with their financial goals and values.

At Physis, we provide investors with an intensive amount of sustainability information regarding funds and asset managers. Through our innovative platform, investors can align their portfolios with the ESG issues they would like to address. Join us today!