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fondsweb.de - Innovations 2020: Top funds and ETFs on the sustainability trend 02.12.20

(boerse-online) - Among the funds and ETFs that have been newly launched in this country, there is one trend in particular: sustainability. Euro presents some of the most recent additions. By Julia Pfanner

As in many other areas, there are trends in the investment industry that are reflected in new products, among other things. While Euro described three different trends here last year, this year we are concentrating on just one, the ultimate high-flyer: sustainability.

Sustainability has become a very important factor in many areas of the economy and society. Whether less climate-damaging emissions are emitted, less waste is produced or biodiversity is to be preserved - environmental protection is a high priority. It also deals with social aspects such as equality, good working standards and respect for human rights. It also means that companies are well managed. This applies, for example, to the criteria for how a company remunerates board members or makes decisions.

Social change, through which such aspects and many more are becoming significantly more relevant, has been reflected in the investment industry for years. More and more money is flowing into products that have a sustainable orientation - according to the analysis company Morningstar, around 40 percent of the newly invested fund money in Europe is currently going into sustainable funds. And new products keep pushing into the market. "This is a gigantic trend, it is not a flash in the pan either. The trend towards ESG investments has been increasing massively since 2018. The fund providers have started accordingly and are diligently launching ESG products," says Ali Masarwah, editor-in-chief and analyst at Morningstar. A few years ago sustainable investing was still a niche topic, now it is, to put it in new German, a megatrend. The auditing company PwC recently described so-called ESG investments, which pay attention to the environment, social issues and corporate governance, as the biggest fundamental change in the investment landscape since the introduction of ETFs (exchange-traded index funds). According to PwC, between 41 and 57 percent of fund assets in Europe will be in products that are managed according to ESG criteria by 2025. In absolute numbers that should be between 5.5 and 7.6 trillion euros. For comparison: at the end of 2019 the proportion was around 15 percent.

Better but not perfect

Another contributing factor to the trend is that poor ESG behavior by companies means great financial risks for them. Just think of the VW diesel scandal. In return, ESG portfolios offer many advantages. "Here you can often find properties that investors like, such as stable business models, competitive advantages or less risk of failure," says Morningstar expert Masarwah. Last but not least, a new generation of investors is pressing in. And she has specific ideas about sustainable investing. That should also accelerate the trend.

Many products are very similar in their approach to sustainability. Overall, however, funds or ETFs are becoming more and more differentiated, also because the database is getting better and better with regard to sustainability. "The data are relatively good today. Even if they are not complete," explains Masarwah. In addition, there is a lack of clear definitions and the regulation of such products does not go far enough. "There is still a lot of scope for greenwashing," says Masarwah. In other words, products are given a green coat of paint that does not have a lot of substance. Investors should still take a close look at such products.

One trend, many varieties

The abbreviation ESG does not necessarily have to appear there. There are several indications for a sustainable approach. For example, the abbreviation SRI for socially responsible investing, or impact investments that aim to solve environmental or social problems. There are also theme funds that focus on areas such as renewable energies. But even if the trend is huge, the following applies to new funds and ETFs: not all products will catch on, many will disappear quickly.

Equity funds with a sustainability approach

In the past twelve months, numerous new equity funds and ETFs have come onto the German market that are trying to invest sustainably. ETFs, which jumped on the trend a little later, are now gaining ground, because the data basis for selecting sustainable investments has become better. This makes it easier for the underlying indices to sort out certain companies. With ETFs, no fund manager selects the individual values; instead, they depict the development of indices. For both the funds and the ETFs, manufacturers of alcohol or weapons and operators of nuclear power plants are often excluded on the first level of the sustainability filter. Companies that violate the UN Global Compact, a pact between companies to make globalization more environmentally and socially acceptable, are often left out. Then there are other ways of choosing sustainable investments. Often companies are chosen that have a high or the highest ESG score compared to the rest of their industry. For example, the ETFs from Amundi and Credit Suisse take precedence or two of the actively managed Deka funds (dividend strategy and GlobalChampions). With the Invesco S&P 500 ESG ETF, only a quarter of the standard S&P 500 with the worst ESG ratings in any industry is left out. The portfolios of Deka ETFs appear to be somewhat stricter. You invest in companies that achieve at least a certain ESG rating from the index provider MSCI. In the weighting, companies that emit less CO² are also weighted higher. The Lyxor MSCI World Climate Change ETF is also based on this point. The Lyxor DAX 50 ESG ETF only relies on the largest German companies that are particularly sustainable. When it comes to sustainability, the Assenagon Value Small Cap Global pays particular attention to which companies have improved their ESG scores or who emit significantly less CO² than the overall market. The JP Morgan Emerging Markets Sustainable Equity focuses primarily on sustainable companies or also on those that are becoming more sustainable.

Some of the products we have selected are also thematically more specifically geared towards sustainability: Franklin Templeton's ETFs focus on companies that are in line with the 1.5 degree target for global warming. Deka-Sustainability Impact Aktien invests in companies that make a positive contribution to environmental or social issues, such as climate protection or the fight against poverty. The Blackrock Global Impact proceeds in a similar way, in which a good 80 percent of the fund's assets must flow into such companies. The BNP Global ESG Blue Economy focuses on the sustainable use of the oceans. This includes, for example, the protection of coasts, less pollution or wind turbines at sea. A positive ESG score also plays a role. The Candriam SRI Equity Circular Economy focuses on companies that contribute to the area of ​​circular economy (e.g. in recycling) and are likely to play a leading role here in the future.

Mixed fund with a focus on sustainability

Even with mixed funds, new products have recently come onto the market that incorporate sustainability. As with equity funds, the first level of the sustainability filter is often to exclude certain investments. Then there are other approaches to sustainability. Mixed funds invest in several asset classes. Often the fund assets are mainly divided between stocks and bonds. For example, gold, real estate and much more can be added. For example, the world's largest asset manager Blackrock launched three mixed ETFs in September. In all of them, investors' money is invested in several sustainable equity and bond ETFs. The three products have different risk-return profiles: from a conservative orientation that invests primarily in bonds to a variant in which stocks clearly predominate. At least 80 percent of the investments in ETFs should meet the fund's sustainability requirements, which means that they exclude certain securities according to ESG criteria. In the case of the conservative and the moderate variant, the focus was recently very much on the USA with more than 70 percent of the fund's assets, while the equity-heavy variant is somewhat smaller at a good 60 percent. There are also several new sustainable products for active mixed funds. The Arero World Sustainable Fund, for example, invests 60 percent worldwide in stocks, 25 percent in European bonds and 15 percent in commodities by replicating several indices. The stocks are assessed for sustainability using data from various providers such as MSCI and Morningstar. In the case of raw materials, on the other hand, only farm animals and agricultural raw materials are excluded. The BMO Sustainable Multi-Asset Income invests worldwide primarily in stocks and bonds. Alternative investments such as infrastructure, real estate or derivatives are mixed in. The money flows specifically into companies that benefit society and the environment, for example through sustainable mobility or technical progress. The BNY Mellon Sustainable Global Real Return is also broadly based in the asset classes. He invests worldwide in stocks, bonds, precious metals, other asset classes and hedging instruments. Most recently, equities with around 40 percent as well as bonds and gold were most strongly represented. Companies should be managed well and deal well with their impact on the environment and society. The Deka Fund primarily invests in short-term bonds from companies with good credit ratings. There are also express certificates on stocks and indices. He selects the best companies in an industry according to ESG criteria.

Pension funds with a focus on sustainability

There are also differences in how sustainability is interpreted for pension funds. The iShares ETF invests in government bonds from the euro zone. The aim is to invest more in bonds from countries whose risks from climate change are lower. Most recently, France and Italy have had the most weight in the ETF. With the Ossiam ETF, government bonds from the euro zone are weighted in the underlying sustainability index in such a way that they emit 30 percent less CO² than the conventional index. The Xtrackers ETF invests in corporate bonds that are denominated in euros and have short remaining terms. Sectors such as alcohol, gambling and nuclear power are left out, and companies must also have a certain ESG level. The actively managed funds we select are more interested in how the money they lend to companies or countries is used. While the Deka-Sustainability Impact Renten focuses on issuers who contribute with their products or strategies to achieve the UN sustainability goals, the MainSky-Active Green Bond relies on so-called green bonds that only invest in environmental projects. The Pimco GIS Climate Bond Fund also invests in such papers and bonds from companies that play a leading role in the fight against climate change. With the Fidelity Sustainable Reduced Carbon Bond, the two fund managers are looking for companies that emit little CO² or those that change their business model so that they emit less greenhouse gas.