Introduction to Fair Funds

What to know when investing sustainably

Funds make it easy to invest in firms that are considered sustainable without the hassle to inform yourself about nitty-gritty details. This is what you pay the analysts or fund managers for. However, they also come up with promising sounding names that suggest sustainable firms to the core. Despite their nice sounding names, some funds might not live up to your definition of sustainability.

What they are

Funds package shares or other financial products into one digestible item which you can invest in. They come in two flavors. The first one is mutual funds. A fund manager picks stocks and assets to build a fund. This is also referred to as “actively managed”. You have to pay the manager with fees which makes them comparatively more expensive. They try to beat the market index. However, on average they do not succeed in beating the market.

The second flavor are Exchange Traded Funds (ETFs). Analysts create rules to replicate an index or mirror a specific investment topic. Sustainability for example is one such topic. Such thematic focus requires experts and analyst teams. Therefore, costs of topical ETF are comparatively higher than simpler index ETF that replicate indices or geographical markets.

The overall volume of investment funds has risen sharply in the last 30 years. Sustainable funds were rather niche up until recently. Demand has never been higher than the last years, breaking records each year up until today. In 2020, sustainable assets have accounted for an all time high of one third of total assets. In Europe they account for half of all net fund flows.

But do funds make sense when investing sustainably? How can I tell whether a fund is sustainable? 

Advantages

First of all, by investing in funds you can invest broadly. Broad investments minimize risk, especially if you invest long term. If you look for long-term profits, then sustainable funds let you diversify from the start. As an example, this is attractive for saving plans that are aimed at retirement as you can benefit from interests and coumpound interests.

Over time, more and more sustainable funds pop up. Therefore, you will have an increasing number of sustainable funds to choose from. You have the chance to invest broadly or decide on which specific topics to focus on.

Disadvantages

The only way to influence business activities is by choosing which firm gets your money and which does not. When directly investing in a company share you also have the right to vote in shareholder meetings. An actively managed fund representatively takes over in that case. On the contrary, an ETF will never exercise its voting right. This is why it is termed “passive investing” if you choose ETF.

However, you still vote with your money. Sustainable funds often exclude companies with controversial businesses or choose the most sustainable ones within an area according to a “best-in-class” approach. It is up for discussion if this is enough to push for changes. We hope that less sustainable companies choose more sustainable paths to still secure sufficient funding.

A way to substantially influence companies can be done with actively managed funds who choose small firms. They become major shareholders and can vote on more sustainable strategies.

All in all, you entrust the fund managers to invest in sustainable companies. However, it turns out that a closer look is better.

Never trust green labels

“Impact”, “green”, “clean”, “socially responsible”, … the list goes on. Plenty of labels suggest sustainability, but do they fulfil promises beyond their label?

A closer look is worth the effort. ETF might invest into firms that might go against your view of sustainability. Especially if they are broadly diversified. Think about having Nestle, Coca Cola or Pepsi in your “green” portfolio. Would you be fine with this? Avoid surprises by fact checking this and look up the positions that a fund holds. Just search for your fund name + “positions” or “holdings”.

Rule of thumb: Never trust green labels. Fact check to avoid being a victim of greenwashing.

Conclusion

If you have unlimited resources and want to control as much as possible, individual stocks are the best option. You will be able to choose each company that suits your personal idea of sustainability. However, you face higher risk with individual stocks when you fail to invest broadly across markets.

With sustainably labelled ETFs or mutual funds you are able invest broadly and less risky from the start. This especially helps to build a long-term investment for example for retirement.

The fund market changes and provides you more sustainable options each year. Regulators revisit sustainability and refine its definition to ensure that a green label lives up to its ideals. But until then, be wary of sustainability claims of green labelled assets. However, as these funds are managed by other people than yourself you might easily end up with shares in your portfolio that do not meet your personal definition of sustainability.

References

https://www.cnbc.com/2020/12/21/sustainable-investing-accounts-for-33percent-of-total-us-assets-under-management.html

https://www.cnbc.com/2021/02/11/sustainable-investment-funds-more-than-doubled-in-2020-.html

Disclaimer

This article is for information purposes only and does not contain any investment advice. We are no investment advisors. Click the following link to read the full disclaimer.