Walk the talk: 12 funds and 3 stocks to go green – Ally Selby

Whether you’re an avowed “green” or adamantly believe that fossil fuels don’t destroy the planet, there’s no denying that a lot of money is flowing in the direction of “sustainable” and “ESG” funds.

In fact, a Deloitte study released last month found that professionally managed investments with ESG mandates will overtake those without by 2024 to reach US$80 trillion. This year alone, assets managed by professionals with ESG mandates are expected to reach US$55 trillion, according to Deloitte (more than 43% of all assets managed by professionals, globally).

Again, these are global numbers. But it’s nothing less than breathtaking, is it?

Deloitte estimates of ESG assets under professional management to 2025. (Source: Deloitte)

At the local level, it is not so different. For example, researcher Calastone found that ESG funds were the top recipients of capital for Australians in 2021, having more than quadrupled year-on-year to $3 billion.

Not surprisingly, investment management companies around the world are responding to this growing interest in sustainable and ethical products by launching their own. Deloitte found that there were more than 1,600 new launches of exchange-traded funds (ETFs) and managed funds (outside the US) last year, representing 12% of all new float funds. In the US alone, 22% of all fund launches were ESG-related products.

In Australia and New Zealand, Morningstar identified 154 sustainable funds in Q4 2021. Interestingly, active strategies are preferred over passive strategies in this area, receiving 63% of fund flows in 2021.

But how many of these funds are actually “true to label”?

About 10, according to Angela Ashton of Evergreen Consultants. And as Andrew McAuley of Credit Suisse Australia notes, identifying greenwash isn’t exactly easy for retail investors (corporations and investment teams have gotten spectacularly good at it).

So in this roundtable, you’ll hear how Ashton – one of Australia’s top investment consultants, and McAuley – one of the country’s top wealth managers, put clients’ money to work to generate long-term sustainable returns and also help to decarbonize the planet.

They also identify 12 different funds in a variety of asset classes that investors can use to gain exposure to this fascinating theme, as well as three stocks that caught McAuley’s attention.

Note: This roundtable was filmed on April 26, 2022. You can watch the video or read the summary below.

A short summary

The main challenges facing investors like you

When asked what challenges investors face when trying to gain exposure to decarbonization, Ashton said “a lot.”

“Basically, there aren’t many pure decarbonization opportunities available,” she said.

“There are a lot of companies doing things around adaptation, or they are starting to change the way they approach climate change as an issue, but it depends on what people want from decarbonization and what they’re looking for. The reality is, the number of funds and maybe stocks that are really actively looking to positively change what’s going on, isn’t exactly great.”

So when investors attempt to build funds or even portfolios of these decarbonization players (the ones that exist), diversification immediately becomes an issue, Ashton adds.

For McAuley, the main issues Credit Suisse faces relate to the consistency and validity of funds (and stocks) measuring carbon intensity and carbon capture.

“Who measures it? How does it measure it? We all quote tons of carbon produced, or CO2 produced and how much is captured, but you really have to question the accuracy of those measurements,” he said.

“The universe of investment options is still not great.”

Top tips for identifying the good from the bad in sustainable funds

McAuley thinks there are two things investors can focus on as they begin their sustainable investing journey:

  1. Get an idea of ​​how much carbon your portfolio is producing and aim to improve it.
  2. Consider whether you want to eliminate carbon from your portfolio or reduce carbon from your portfolio (by investing in companies that adopt better practices or through investor activism).

“Creating a smart, diversified portfolio with an ‘elimination’ strategy — a net-zero strategy — is always, very, very difficult,” McAuley said.

There are generally two leagues of investors when it comes to sustainable investing: those who want to eliminate exposure to carbon-intensive companies and those who want to engage with fossil fuel companies and reward those companies if they take measurable steps to decarbonize, he said. .

That aside, the first thing investors should consider when evaluating a “sustainable” or “decarbonization” fund is “people, process and performance,” McAuley said. After that, investors should:

  1. Look at the portfolio’s carbon intensity and how it compares to the benchmark.
  2. Can the fund prove that it “trades” – that is, it invests in companies that adopt more sustainable practices compared to those that are not.
  3. Assess whether the fund has integrated the Sustainable Development Goals into its process.
  4. Measure if the fund is actually having an impact – by investing in technologies or solutions that fight climate change.
  5. Ask how long an investment manager has been doing this – what is their pedigree and do they have a well-known brand?

Meanwhile, Ashton recommends investors seek out funds that are signatories to the UNPRI and the Responsible Investment Association Australasia (RIIA) member – those who are committed to investing sustainably in all of their products (and not in a single fund).

Other factors Ashton recommends investors monitor include:

  1. Specialized talent or systems for a manager to deliver decarbonization.
  2. Investment managers who dedicate their resources to sustainable investing – rather than having just one token sustainable fund.
  3. To identify greenwash: Look under the hood at a portfolio’s top 10 holdings – are they in line with your expectations or not?
  4. Just because a fund says it’s sustainable doesn’t mean it is. Similarly, just because a fund doesn’t say sustainable in its name doesn’t mean the investment manager itself hasn’t put in place a rigorous process.

“Some of the big fund managers that have gone into it don’t have sustainability in their name, they are sustainable on every level,” Ashton added.

Ashton’s top fund managers for decarbonisation, sustainability and ESG exposure:

  • Robeco
  • AllianceBernstein
  • Regnal
  • Pendulum group
  • artesian
  • Positive investment management
  • Impax Asset Management
  • Munro Partners
  • State Street Global Advisors
  • Inspire impact

Top McAuley funds and stocks for decarbonization, sustainability and ESG exposure:

Funds:

  • FP WHEB Sustainability Fund
  • Rockefeller Ocean Engagement Fund

Shares:

  • Deere & Company (NYSE: DE)
  • Worley (ASX:WOR)
  • BP (NYSE: BP)

A stat you can’t ignore

Ashton tapped recent research from Plato Investment Managementwhich measured the performance of high carbon stocks versus low carbon stocks.

“The difference in performance over the past 10 years is -40%. So these carbon-intensive stocks have underperformed by 40%,” she said.

Source: Platon Investment Management.
Source: Platon Investment Management.

Meanwhile, McAuley’s startling statistic surrounded the rise of non-meat products in response to greenhouse gas emissions from livestock (and meat processing).

“We estimate that 25% of all greenhouse gas emissions come from meat production,” he said.

“There’s a lot of noise and a lot of noise about plant-based meat production…You could make it a fad. It’s not a fad. There’s still going to be a lot of attention, and a lot of investment and technology applied to reducing that big 25%.”

The opportunity in plant-based meats.  (Source: Credit Suisse)

The opportunity in plant-based meats. (Source: Credit Suisse)


Want to know more about decarbonization?

Livewire’s Decarbonization Megatrend series brings you in-depth articles that delve deeper into carbon neutral investing, as well as special episodes of Buy Hold Sell, a megatrend investing podcast, and interactive roundtables with top fund managers. To visit our Series page, please click on the link below.

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