'Deep green' funds most popular despite economic downturn
Sustainable investment funds that can provide hard evidence of their ESG efforts are raising money much more easily during the current downturn in the economy than funds that are less ambitious. Funds that do not focus on sustainability are completely out of favour.
The Economist describes in its latest edition that despite the war in Ukraine, rising oil and gas prices and greenwashing scandals (DWS in Germany, HSBC in the UK), investing remains popular in assets that score high when it comes to Environmental Social Governance (ESG).
But despite all the talk of a backlash, SRI funds have been much more resilient than other funds during this year's downturn. According to data firm Morningstar, $139 billion had flowed into sustainable funds by the end of September, compared with $643 billion of net outflows from the broader market. European funds attracted the most money, with 89% of total inflows into sustainable funds, but even in America, such funds attracted more money than other investment vehicles.
Managers of sustainable funds point out that their investors are not too bothered by short-term returns, The Economist writes. People who put money into ESG believe that the energy transition is not something that happens in a few years, but a long-term trend that will inevitably make their investments pay off. Oil majors may have been a good investment this year, they admit, but that will stop as the deadlines for achieving net zero emissions get closer. Sustainable-thinking investors tend to be young and have an investment horizon of decades. They do not worry about a few years of poor performance.
Indeed, Morningstar data shows that the greener the fund, the more likely it is to have enticed investors to stay. The EU's Sustainable Finance Disclosure Regulation, a regulation on standards for climate investments, divides funds into three categories. Those in the greener category, known as Article 9 funds, had the largest net inflows in the third quarter of the year. Article 8 funds, sometimes called "light green" in the industry, have seen net outflows - but not as large as those of Article 6 funds, which do not focus on sustainability at all.
A feature of these Article 9 funds, which are also rapidly gaining popularity in real estate, is that they are funds with sustainable investment as their objective and these funds should also be able to provide hard evidence of this. But even for Article 8 funds, which focus on sustainability characteristics, it is important to make ESG measurable. Playing the long-term game is increasingly important, including in real estate: Even if you don't aim for classification as Article 8 or Article 9 under SFDR, measuring ESG makes sense sooner rather than later. You can choose to measure just the basics, or go all in. Either way, these measurements benefit your company in the long run in several ways.