The idea that sustainable funds will be more expensive than conventional funds due to the extra cost of sustainability research is not necessarily true. Both active and passive funds turn out to be cheaper. Sustainable funds are classified under European regulations into Article 8 and Article 9 funds. Within the latter category, we rank the cheapest options within global large-cap equity funds.
In 2019, the EU introduced a directive that categorised funds into three groups based on their sustainability objectives and levels of disclosure requirements related to sustainability. Within this Sustainable Financial Disclosure Regulation, SFDR for short, so-called Article 9 funds are the most sustainable. They have sustainable investing as a specific goal and can thus be referred to as dark green funds. This group includes, for example, many climate-related strategies and impact funds, or funds that not only focus on financial returns, but also aim to make a positive contribution to society and/or the environment.
In contrast, Article 8 funds only aim to promote ecological or social aspects and are therefore more likely to be light green. Finally, there are the Article 6 funds which include all other funds that have no specific or explicit sustainability objective.
Small cost differences weigh considerably on final return
As with conventional investment funds, costs also play a role in the final return of sustainable funds. After all, costs come off the gross return and the higher the costs, the harder it will be for a manager to beat the benchmark. Moreover, small differences in costs weigh considerably in the final return an investor achieves through the interest-on-interest effect. For example, a fund with 1.5 percent costs after 20 years for a gross return of 6 percent will yield as much as 9.1 percent less than a fund with costs of 1 percent.
The idea with sustainable funds may be that they will be more expensive than conventional funds. After all, in addition to the cost of the financial research done to select securities, sustainable funds involve an additional layer of required research. Integrating sustainability factors creates additional costs for the fund house and these might well be passed on to the end investor. Yet that conclusion is not so easy to draw. Indeed, research by Morningstar a few years ago showed that active sustainable equity funds in Europe were on average even slightly cheaper than their conventional equivalents.
On the passive side, too, we see that being sustainable is not necessarily more expensive. Take, for example, the iShares MSCI World ETF and the iShares MSCI World SRI ETF. The former conventional ETF has ongoing charges of 0.50 percent, while the sustainable ETF is offered at ongoing charges of 0.20 percent.
Top 5
This week’s top five lists the five cheapest global large-cap equity funds classified as Article 9 under SFDR. The ranking is based on the distribution fee-free fund class available in the Netherlands and Belgium).
AXA World Funds - Global Factors - Sustainable Equity
AXA World Funds - Global Factors - Sustainable Equity is the cheapest fund in our ranking with ongoing charges of 0.46 percent. The fund carries a Morningstar Analyst Rating of Silver. The strategy is based on a quantitative approach that focuses on low volatility and high-quality companies. This is simultaneously combined with the integration of sustainability criteria where certain industries (including tobacco and cluster munitions producers) are excluded completely, while the remaining stocks are ranked based on their ESG performance. The approach produces a portfolio that is highly diversified and had as many as 336 positions as of the end of July 2022. The fund is managed by Gideon Smith and Ram Rasaratnam. Smith is global CIO and head of research at AXA IM Equity QI, a unit of AXA Investment Managers that specialises in quantitative strategies. Rasaratnam co-CIO of quantitative equity funds.
Baillie Gifford WW Positive Change
With a current expense ratio of 0.55 percent, Baillie Gifford WW Positive Change takes the second spot. The fund is rated Neutral by Morningstar analysts. Scottish firm Baillie Gifford is known for its strategies aimed at investing in growth stocks and this product is a natural extension of that. It focuses on companies that contribute to solving social and/or environmental challenges. With only 35 stocks, the portfolio is highly concentrated. The portfolio is characterised by a strong growth style, a large overweight in the health sector and a penchant for companies with smaller market capitalisations. The fund is managed by Kate Fox, Lee Qian and Thaiha Nguyen who are part of a team of eight that in addition to them consists of two equity analysts and three impact analysts. They can additionally draw on insights from other teams within the company, which makes them reasonably well equipped for their task. However, the team is yet to prove itself in this composition as they have only been working together on this fund for a few years.
NN (L) Global Equity Impact Opportunities
Number four in the list we find a fund from The Hague-based fund house NN. NN (L) Global Equity Impact Opportunities has a current expense ratio of 0.60 percent and is managed by Huub van der Riet, Ivo Luiten and Marina Iodice. The fund invests in companies that make a positive contribution to one or more UN sustainable development goals. These are grouped by the team under various themes: sustainability of natural resources, improved connections and sustainable economic growth, as well as health and well-being. The portfolio is concentrated with around 40 stocks, with more than half of the fund’s assets invested in the technology and healthcare sectors.
Top 5 as per NL fund class:
Top 5 as per BE fund class:
Ronald van Genderen is a senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds on the basis of quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.