Labeling existing investment funds as ‘sustainable’ or ‘ESG’ rather than launching a new fund is increasingly popular among asset managers. In the third quarter of 2020 alone, Morningstar counted 32 such rebrands.
No less than a third of all the sustainable funds that were launched this year is an existing fund that was rebranded, according to the data provider. Asset managers generally have two reasons for rebranding funds, says Morningstar analyst Elizabeth Stuart. ‘In some cases, asset managers have repurposed a fund purely for marketing purposes without changing the fund structure or investment philosophy. In other cases, the old fund is just used for logistical reasons to house a totally refreshed set of holdings.’
Sometimes both these considerations seem to play a role, such as in the case of DWS which is the undisputed leader in ESG fund rebranding. As many as 40% of the 28 sustainable funds of the German asset manager are originally non-sustainable funds. DWS says it has opted for this approach to avoid ‘cannibalisation’ of its existing funds, which could have occurred if it had chosen to start an entirely new fund.
A total of 648 investment funds in the 10 years until September 2020 have change into a sustainable fund, according to Morningstar. And the trend continues unabated this quarter. In November, the Columbia Threadneedle Pan European Equities Fund added the acronym ‘ESG’ to the name of the fund that has been in existence since 1998.
Culmination
This was the culmination of a process to integrate ESG criteria into fund management that took many years, says fund manager Ann Steele. ‘In 2016, we realised at Columbia Threadneedle that ESG was the way forward so we set up a dedicated responsible investment team. From that moment on, we also took non-financial aspects into account in our investment process.’
According to Steele, this has resulted in a gradual adjustment of the investment portfolio. For example, Ryanair was sold in 2017 due to its poor treatment of staff. ‘We spoke to CEO David O’Leary several times at the time, but he had difficulty in understanding what workers’ rights were.’
Steele gives another example. ‘Last year we sold the pharmaceutical company Novartis because they involved in corruption in Greece and were not doing enough about it. In the end, our patience ran out and we traded the company for Roche, which has no such problems.’
But the most important change in the portfolio compared to a few years ago is that the fund now barely invests in the energy sector. ‘The only oil company we still invest in is Neste, which is big in biofuels.’ The Finnish company derives the lion’s share of its profits from the production of biodiesel. The fund’s position in Shell was sold this year. ‘We think they are too slow in making the transition to renewable energy,’ says Steele.
No impact fund
The fund’s exit from fossil fuels does not mean, however, that it now excludes the sector. The exclusion list used by the fund is limited to tobacco producers, coal, nuclear energy, weapons and companies that violate the UN Global Compact. ‘We are not an impact fund, and we have a lighter touch’, says Steele, who also invests in private equity company 3i, the owner of discount chain Action. ‘So the fund’s benchmark has not changed, it is still the MSCI Europe. We want to compare ourselves not only with sustainable funds, but with all European equity funds.’
Nevertheless, Steele does want to have an ESG label (such as that of Luxflag, or the French Greenfin label). ‘Certainly our sales team would like to see that, and they are working on it. Clients regularly ask for this as well.’
Steele has also noticed that sustainable funds are ‘hot’. Although de facto nothing has changed in the portfolio after the rebrand, the €276 million large fund welcomed substantial inflows immediately after adding ‘ESG’ to the name. ‘Our fund’s assets under management increased by more than €72 million in just a month, mainly due to existing clients. Others have told us they are going to follow us for a while, and then may want to invest.’