8 Funds for Impact-Minded ESG Investors

Earth Week 2023: We found sustainability-themed funds with strong Medalist Ratings  

Kate Lin 21 April, 2023 | 10:13
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It’s impossible to understate the severity of the current climate and resource crisis facing the world. 

Each year, we consume 1.6 planets’ worth of earth’s resources. That means, we are depleting natural resources faster than nature can replenish them. Moreover, the International Energy Agency estimates that annual investments in clean energy and infrastructure will need to more than triple by 2030 to around US$ 4 trillion, in order to set the world on a 1.5°C path.

Commitments and pledges are growing but they still fall short of what is needed to avert the worst effects of these overwhelming problems.

April 22 is the 53rd annual global Earth Day, a reminder for all individuals and corporations alike to transform words and promises into money and action.

Finding Thematic Products

Morningstar’s tools can help investors screen the funds best aligned to values. 

We screened for all funds for sale in Hong Kong to find sustainability-themed investments that focus on one or more Morningstar Sustainable Attributes: Climate Action, Healthy Ecosystems, or Resource Security.

The screener yields eight funds that have Morningstar Analyst Ratings or medalist analyst or Morningstar Quantitative Ratings.

Among the 94 asset managers in the opportunity set, Impax by BNP Paribas Asset Management earns a Morningstar ESG Commitment Level of Leader, while Blackrock, Fidelity International, JP Morgan, and Pictet earn a Basic rating.

Pictet Global Environmental Opportunities Fund falls under the Morningstar Category of Sector Equity Ecology and invests in companies that seek bring about positive climate action and resource security.

The Bronze-rated fund has US$ 8.2 billion under management and is among the largest of its kind. As of March 31, 2023, the 43-stock portfolio invests 63.7% of assets in the U.S., 8.2% in France and 6.6% in Japan. All of its top ten holdings are U.S. companies, including engineering simulation software provider Ansys, public utility American Water Works, and lab supplier Thermo Fisher Scientific.

Strategies within the Sector Equity Ecology Morningstar Category generally have a growth tilt versus the MSCI ACWI category benchmark, but the portfolios in this category tend to have even stronger growth profiles.

Meanwhile, the portfolio’s size profile has a structural tilt towards mid-caps there will hardly be any exposure to small- or micro-caps, as liquidity is a key factor in the scoring part of the fund’s investment process.

Following a bottom-up approach and environmental focus, the portfolio will have meaningfully different sector allocations than the category benchmark.

Morningstar manager research analyst Ronald van Genderen, who covers this fund, says it is a solid proposition among ecology strategies, scoring above average across the People, Process, and Parent pillars. The fund structurally overweights the technology sector and has a growth tilt. The portfolio is also inclined towards mid-cap stocks.

“The step-by-step process is very structured and starts with defining the investable universe based on selecting companies with small environmental footprints. This screening is driven by the distinctive use of a planetary boundaries framework, which identifies nine key environmental dimensions,” van Genderen notes.

Clean Energy Play

Another behemoth on the list by fund size is BGF Sustainable Energy with US$7.2 billion in assets.

Unlike the Pictet fund, this BlackRock strategy focuses on opportunities around alternative energy producers and enablers. For example, the third largest holding in the 47-stock portfolio is RWE AG, a German company generating electricity using offshore wind power.

Enablers are companies that provide energy technologies and solutions, such as South Korea’s Samsung and LG Chem, which rank fourth and fifth by portfolio weighting at the end of March.

New energy isn’t the only way to invest for climate change. Portfolios buying into assets that contribute broadly to the transition to a low-carbon economy can also help. Global X Autonomous + Electric Vehicles ETF is another example of a climate action fund and has delivered the strongest year-to-date performance among the eight funds.

Furthermore, decarbonization, greenhouse gas emissions, climate change adaptation and mitigation, and climate solutions are some other sub-themes that climate action funds would pursue.

Invest to Secure Our Resources

Other than climate change, planet Earth feels the pain from another overwhelming problem: resource depletion following decades of accelerated urbanization and a rapidly growing population. This gives rise to initiatives and investment strategies to drive better natural resources, food, and waste management to ensure all living things can benefit from them now and in the future, sustainably.

Resource conservation is only one of the numerous ways to secure future resources. Themes sprawl from building on a circular economy to promoting better food and other waste management and recycling.

Despite being a thematic fund, BGF Circular Economy Fund buys into a great number of household names and index heavyweights. Microsoft, L’Oreal, and Nestle are among the top 10 holdings. The largest is, however, U.S. waste disposal company Republic Services.

The opportunity set for this fund is narrowed down to companies that recognises the circular economy concept, which is centered around the importance of a sustainable economic system and works to eradicate unsustainable behaviors, such as the “make-use-throw away” approach of consumption.

Fidelity Sustainable Water & Waste Fund also calls for financial capital to defend scarce resources but with a sharp focus on water and waste management.

Healthy Ecosystems

Overconsumption of the Earth’s resources is also wreaking havoc on biodiversity.

The world cannot be sustainable without ecologically sound environments on land, air, and water for living things other than humans.

For instance, putting money into pollution reduction and remediation activities can positively impact the environment. Biodiversity, deforestation, life under water, natural ecosystems, planetary boundaries, planetary health, and sustainable agriculture are some of the focuses healthy ecosystems funds have.

Examples are Bronze-rated BNP Paribas Global Environment Classic Capitalisation and the only multi-asset fund on the list, JP Morgan Future Transition Multi-Asset.  

The BNP Paribas strategy is concentrated, with only 47 stocks in its portfolio at the end of March. “Portfolio candidates must derive at least 20% of their business from what the team thinks are environmental activities, such as energy efficiency, water infrastructure, and pollution control,” according to van Genderen. He says, “The portfolio managers hunt for growth companies but are also valuation-conscious and will avoid stocks they deem overvalued. The strategy has built a solid track record since its U.S. equivalent’s inception in 2008.”

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About Author

Kate Lin

Kate Lin  is an Editor for Morningstar Asia, and is based in Hong Kong

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