Sustainable investments: First funds on the market with climate strategies

The sustainable investments boom continues: The number of sustainable mutual funds on the market has grown to 1,289 funds from 777 in the previous year (+66 per cent). The related assets under management increased from CHF 316 to 775 bn (+145 per cent) (figure 1). However, which funds should qualify as “sustainable” remains a matter of debate. In March 2021, the EU set new standards for sustainable investment funds. The study now reveals that these standards are not as straightforward as they could be, leaving ample room for interpretation. “Only those funds should be considered sustainable where sustainability criteria are essential to the fund strategy,” says Manfred Stüttgen, co-author of the study and professor at the Lucerne University of Applied Sciences and Arts. “If fund providers transparently and bindingly communicate their sustainability commitment this is a strong indicator of the investment’s superior quality in terms of sustainability,” co-author Brian Mattmann adds.

^{The sustainable investments boom continues: In 2021, assets under management by sustainable mutual funds increased from 316 to 775 bn CHF compared to the previous year (+145 per cent), the Sustainable Investment Study of the Lucerne University of Applied Sciences and Arts finds. (Figure 1: Development of sustainable and conventional mutual fund assets; in bn CHF, as at 30 June; click to enlarge).}

Half of the sustainable funds are in line with the Paris climate goals

200 of the 1,289 sustainable funds pursue a clearly discernible climate strategy. Climate strategies are an innovation in the investment world. Funds with climate strategies are aligned with selected climate goals and metrics. These strategies are designed to decarbonise portfolios, manage the climate-related risks of investments, reduce the harmful impact of investments on the environment and to unlock attractive financial opportunities. Suitable metrics include the investments’ CO2 intensity, their temperature path, and their compatibility with the Paris climate accord. Still, applying such metrics is very challenging and poorly standardised to date.

The study reveals that sustainable funds are more likely to meet the Paris climate goals than conventional funds. Sustainable funds increasingly invest in companies that operate within a CO2 emissions budget that complies with the Paris climate accord. “Implementing the Paris climate goals is complex, however, and the different implementation strategies yield inconsistent results,” says Brian Mattmann of the Lucerne University of Applied Sciences and Arts.

Fund providers invest in climate expertise

Implementation, however, is hampered by the lack of valid data, robust modelling and reliable future scenarios. Fund providers are currently building the know-how required to meet the climate goals through suitable investment strategies. Moreover, the EU’s new regulatory guidelines set new standards for fund providers working towards achieving the Paris climate goals. Despite the growing availability of climate metrics for financial investments, it is still difficult – at least for private investors – to assess the climate friendliness of funds.

^{Regional differences have a major impact on a fund’s carbon intensity. In highly developed countries such as Switzerland or the US, many companies are active in the services sector where low-carbon business models prevail. Accordingly, investors buying shares in these companies are less affected by climate risks. (Figure 2: The average carbon intensity of sustainable and conventional equity funds, sorted by geographic investment focus; click to enlarge)}

The implementation of climate strategies is spearheaded by passive funds that track sustainable indices. Of 227 sustainable passive funds, already a quarter have a comprehensible climate strategy attached to them. “If you compare the funds’ climate strategies, you will find that passive sustainable funds are often more straightforward than actively managed sustainable funds,” Manfred Stüttgen explains. However, regional differences in the investment focus also play a key role in a fund’s carbon intensity (figure 2). The study authors question whether climate strategies in the investment process promote a more climate-friendly economy overall. “The primary purpose of climate strategies in a portfolio is likely a more systematic management of financial climate risks and opportunities,” says Manfred Stüttgen.

New providers flood the market, courting sustainable investors

214 providers currently compete for the money of sustainable investors in the Swiss funds market, forty of whom have appeared on the scene in the past twelve months. The top fifty fund providers by assets under management all managed to benefit from this growth spurt (figure 3). Inflows of new money are the main driver of this growth. The competition, however, remains intense and the market shares continue to shift. Almost all major product segments now offer sustainable funds. These include niche segments such as sustainable real estate funds, government bond funds, money market funds, and commodity funds and, not least, the persistently growing thematic climate funds.

^{In total, 214 providers currently compete for the money of sustainable investors in the Swiss funds market. The top fifty fund providers by assets under management all managed to benefit from this growth spurt. (Figure 3: The fifty largest providers of sustainable mutual funds in Switzerland; in million CHF, as at 30 June 2021/2020, in brackets after provider: change in ranking vs. mid-2020, in brackets to the right: asset growth in per cent vs. mid-2020; click to enlarge).}