Investment Insights: Five Keys for Selecting a Sustainable Investment Fund
Selecting a sustainable investment fund can help investors play a part in creating a sustainable future. It can also help them profit in a changing world. Sustainable investment funds are ones that align with broader environmental and social goals and aspire to foster a positive impact.
Efforts to combat false green claims, or greenwashing, has meant these funds are facing added scrutiny on their labeling and impact. One of the best-known regulations governing sustainable investment funds comes from the EU in the form of the Sustainable Finance Disclosure Regulation (SFDR). The SFDR can also provide valuable criteria for selecting a credible and appropriate fund.
Understanding SFDR
SFDR requires transparency in fund disclosures, helping potential investors make informed decisions about where to put their money. Three types of funds are key to consider: Article 6, Article 8, and Article 9.
Article 6 applies to all financial products that do not fall under the more specific criteria of Articles 8 and 9. This includes traditional investment funds that may not have explicit sustainability objectives as their primary focus. However, Article 6 still requires these funds to consider sustainability risks in their investment decisions and disclose how these risks are integrated into their investment processes.
Article 8 (light green) funds might not have sustainability as their core objective but they promote environmental or social characteristics, making them suitable for firms looking to integrate ESG factors into their investment portfolios without fully committing to sustainability as the primary investment goal.
Article 9 (dark green) funds are dedicated to sustainability objectives. These funds are designed for firms that aim to make sustainability the heart of their investment strategy, contributing directly to environmental or social initiatives.
Decision Criteria when Selecting a Sustainable Investment Fund
The five criteria below aim to help potential investors identify the right funds for them based on a variety of criteria.
1. Alignment with the Firm’s Sustainability Goals
The fund's objectives should resonate with the firm’s sustainability priorities, whether focusing on renewable energy, clean technology, or social equity. Examine the fund's portfolio to ensure it invests in companies or projects that genuinely contribute to environmental or social improvements and are well-suited to the aspirations of the firm.
Implementation tip: A firm focusing on reducing its carbon footprint might invest in an Article 9 fund dedicated to renewable energy projects, directly supporting the transition to a low-carbon economy.
2. Transparency and Reporting Standards
Transparency in how a fund operates and reports its sustainability impact is crucial. Firms should seek funds that provide clear, detailed reporting on their sustainability policies, decision criteria, and due diligence processes.
These are crucial to enabling the tangible impact of their investments. Effective reporting demands compliance with local regulations, but also often includes participation in internationally recognized reporting initiatives such as the Global Reporting Initiative (GRI) or the International Sustainability Standards Board (ISSB), which also provide insights into sustainability-related risks and opportunities.
Implementation tip: Look for funds that offer comprehensive annual sustainability reports with clear metrics and targets on areas such as greenhouse gas emissions. In addition, look for funds whose issuer reports under widely used international reporting standards.
3. Regulatory Compliance and Assurance
While it is easy to say that compliance with regulatory expectations is a minimum standard, new regulations such as the EU’s SFDR are highly detailed. Funds failing to meet the criteria of the article they claim to align with may face reclassification or penalties.
Review the required disclosures under each article and how the fund claims to be meeting them. Strong rationales and robust documentation can indicate fund managers have done their homework with these important regulations.
In addition, expectations are rising for sustainability claims to be assured. This assurance process is still in its infancy as the relevant standards are implemented and auditing firms build the requisite skills.
However, third party assessments of a sustainable investment fund will increasingly become the norm and should provide confidence for firms looking to invest.
Implementation tip: Look for funds certified by standards such as the Principles for Responsible Investment (PRI), indicating robust sustainability practices and ethical investment strategies.
4. Performance Track Record
Even with impact as the primary criteria, firms should not need to sacrifice financial performance in choosing a fund. The accelerating clean energy revolution and the pace of climate technology development present major commercial opportunities. Many estimates place the total investment need for a net-zero energy system at $100 trillion between now and 2050.
Firms should also consider the fund’s track record in terms of returns, risk management, and resilience. Within this assessment of past performance, A strong performance history, coupled with sustainable investing principles, signifies a fund's capability to deliver on both financial and environmental fronts.
Implementation tip: Consider funds that have consistently outperformed their benchmarks in both financial and sustainability metrics, demonstrating their ability to effectively manage investments towards achieving duel aims of financial and sustainability returns.
5. Management Team and Strategy
Just as with traditional funds, the expertise and approach of the fund's management team are essential to success. For sustainable investment funds, there is an added skillset related to sustainability and impact that the fund’s leaders should have.
Investigate their experience in sustainability and sustainable investing as well as their strategies for identifying and managing sustainable investments. The fund should be taking a proactive, research-driven and systems-thinking approach that considers future trends and regulatory changes in their investment decisions.
Implementation tip: Identify funds managed by teams with a strong background in sustainable finance and/or expertise in sustainability-related fields such as renewable energy or ecosystems solutions. This background will prove an asset in navigating the dynamic landscape of sustainable finance.
The selection of a sustainable investment fund is both a commitment to a sustainable future, but also a responsible financial decision. By applying the five criteria outlined above, firms can strategically choose the right funds to meet their goals, both societal and financial.