Sustainability funds have been selling like hot cakes in recent years. Not surprisingly, many fund houses like to see their funds classified as Article 8 or 9 under the SFDR. After all, these are the funds where sustainability criteria play a role in the investment process. We provide an overview of the most popular equity funds within this group over the past 12 months.
Europe has seen consistent growth in the assets of sustainable funds in recent years, more recently due in part to the EU›s Sustainable Financial Disclosure Regulation, or SFDR for short. This regulation was introduced in December 2019.
The SFDR divides the investment landscape into three groups according to the sustainability objectives of the products and the levels of disclosure requirements related to sustainability. Funds classified as Article 9 have sustainable investing as their objective and can therefore be referred to as dark green funds.
On the other hand, Article 8 funds only aim to promote environmental or social aspects and are therefore rather light green. Finally, there are the Article 6 funds, which include all other funds that have no specific or explicit sustainability objective.
No sustainability label
The SFDR is not intended as a sustainability designation, but many asset managers are doing their best to classify their funds as Article 8 or 9. After all, sustainability was in the spotlight of investors and large sums of money were flowing into such funds. At the end of 2021, the total assets in Article 8 and 9 funds amounted to no less than 4 trillion euros, or more than 42 percent of the total European fund market was classified as a fund where sustainability criteria play a role.
Although there was still inflow in the first quarter of 2022, it was less spectacular than in 2021. The European universe of sustainable funds attracted some €74 billion, down 37 per cent from inflows of €118 billion in the fourth quarter of 2021. This was one of the largest declines in inflows experienced by sustainable funds in the past three years.
Like the impact of the COVID-19 pandemic in early 2020, the Russian invasion of Ukraine in February 2022 has led to increased uncertainty and volatility in financial markets. An economic backdrop of high inflation and the prospect of aggressive interest rate increases have heightened investor concerns, leading to a slowdown in new money in both conventional and sustainable funds. Although assets in European sustainable funds showed a 4 per cent decrease compared to December 2021, the total European fund universe shrank by more than 7 per cent. This suggests that the assets of sustainable funds were more resilient than their conventional counterparts.
This week’s top five lists the equity funds classified as Article 8 or 9 (of which a distribution fee-free share class is available in the Netherlands) ranked by inflows over the past year to the end of May 2022, regardless of Morningstar category.
Top 5: Fundsmith Equity in the lead
In first place is the Fundsmith Equity of the renowned British investor Terry Smith. The fund has a Morningstar Analyst Rating of Gold, the highest possible rating. His approach is known for its strict focus on finding quality companies that he then prefers to keep in the portfolio forever.
Although the fund is classified as Article 8, sustainability seems to play little or no role in its investment process. It therefore receives only a low rating for the Morningstar ESG Commitment Level. Morningstar stated that such approaches «have raised legitimate concerns about greenwashing among asset managers». A statement Fundsmith did not agree with. The controversy did not stop investors from entrusting more of their money to Smith. The fund welcomed €2.4 billion of inflows over the past 12 months, lifting its assets above €8 billion.
iShares MSCI EM SRI ETF
In second place is iShares MSCI EM SRI ETF. The tracker followed the MSCI EM SRI Index until November 2019, but iShares then changed it to the MSCI EM SRI Select Reduced Fossil Fuel index. MSCI uses a best-in-class ESG stock selection process in constructing the index.
It looks at companies that perform best on ESG risk management, business controversies and climate change data, among other things. In addition, a number of industries are excluded, including weapons, nuclear weapons, tobacco, alcohol, gambling, adult entertainment, nuclear power and genetically modified organisms. Finally, companies involved in the extraction of fossil fuels are not included in the index. Fund assets amounted to EUR 3.8 billion at the end of April 2022, thanks mainly to a substantial inflow of EUR 2.1 billion over the last 12 months.
CSIF (Lux) Equity Emerging Markets ESG Blue, which now has a fund capital of EUR 3.6 billion, takes the lowest step on the podium. Inflows in the past year were just under EUR 2 billion. The index fund of Credit Suisse follows the MSCI Emerging Markets ESG Leaders index, which consists of companies that perform well in the field of environmental, social and governance (ESG) compared to equivalent companies.
Top 5 as per Netherlands fund class:
Ronald van Genderen is a senior manager and 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.
This article originally appeared on InvestmentOfficer.nl.
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