BLI: Are thematic funds the Holy Grail of sustainable and responsible investment?

14 juli 2021

By Fanny Nosetti, Head of Multimanagement, Banque de Luxembourg Investments (BLI)

It would be interesting to travel to other continents to see what’s happening, but here in Europe, fund management is moving to become sustainable and responsible. At what price, how, with what resources and what's the objective? There is no clear-cut answer (yet). Fund management companies are rushing to set up appropriate teams and infrastructures, we are thus assisting in a veritable mercato of fund managers who have developed an expertise in this field.

Thematic funds, which were already popular before the SRI craze, have mushroomed. Fund management companies are trying to ramp up their offer and they dream of launching the new Pictet Water (established over 20 years ago, it is one of the oldest thematic funds, with assets under management of €7.5 billion at the end of May 2021). Hot on the heels of an array of funds linked to ecological transition and climate change, ‘social is the new green’ according to a headline on 22 June in the French newspaper Les Echos. With the ‘E’ in ESG now somewhat overcrowded, fund management companies are focusing on the ‘S’ to try and differentiate themselves. New funds emphasising the ‘social’ pillar are gaining traction. However, the early funds targeting this theme have only had modest success. Some have even decided to broaden the theme for lack of interest in a subject ‘limited’ to gender equality, in order to open up a wealth of possibilities linked to social progress in a broader sense.

The theme has been endorsed in the regulations as a natural extension of sustainable and responsible finance. Thematic funds are the most likely candidates to fall within the scope of Article 9 (products that focus specifically on achieving a sustainability goal) of the European Sustainable Finance Disclosure Regulation (SFDR). The underlying idea is that once an ESG theme is chosen, it is possible to measure the positive impact generated by the fund. Novethic (1) recently analysed an initial sample representing just over half of the French sustainable fund market and found fewer than 200 funds classified under Article 9, in other words 20% of the sample. Three quarters of them were thematic funds.

Investors ready to engage with this new path
With a wider range of funds on offer, clients can decide whether or not they wish to invest in a sustainable way. In a survey carried out by Invesco (2), 79% of respondents said that it is extremely important, very important or important to invest in sustainable and responsible investment solutions. The proportion went up to 90% for the under 45s. In a similar vein, according to a DWS study, over the next three years, 66% of pension funds intend to increase their allocation to passive funds prioritising the ‘S’ category.
Although there is interest, the vast majority of clients admit that they lack knowledge on the subject and doubt the true capacity of fund managers to deliver change. Meanwhile, NGOs are revelling in the situation and not missing any opportunity to sow doubt, arguing that the proliferation of ESG funds is not a guarantee of quality and pointing the finger at greenwashing. For example, the latest article published by Greenpeace Luxembourg (3) explains that "sustainable investment funds hardly send more capital to sustainable activities than conventional funds". Martina Holbach, Climate and Finance Campaigner at Greenpeace Luxembourg, highlights the fact that "offering clients 'green' financial products which, compared to ordinary funds, make no relevant contribution to sustainable development, is tantamount to greenwashing".
This is the nub of the challenge facing fund management companies: by resorting to (overly) glowing marketing, there is a significant risk of not being able to meet the expectations of investors seeking meaning, and therefore of damaging the already limited confidence in this sector.

What is our view?
In recent months, this race towards responsibility and sustainability between regulations and injunctions has raised concerns because it is well known that the road to hell is paved with good intentions. We can already see flaws appearing with the oligopoly formed by data providers, the difficulty in finding relevant data that coincides with the desired impact objectives, and new regulations that sometimes lack clarity or only see things in black and white and which require substantial financial investments and resources for their implementation.
However, this acceleration looks like a good move given the IPCC's calls in the face of the climate change emergency, the loss of biodiversity, and the necessary respect for employment law and its components that include gender equality, diversity and training. Companies should be moving faster, at least in Europe. Finance must realign its funding. Thematic funds have chosen to position themselves as a way of supporting these changes.

But thematic funds have never been our driving force. A missed opportunity or a conscious choice? Rather a methodology that we believe in and which we consider is an appropriate way to build savings over the long term and represents a judicious balance between risk-taking and expected returns. This methodology is obviously expected to evolve but not to be dispersed. Rightly or wrongly, we try to stick to the mantra ‘do more of what you do best’. We have developed our methodology through funds that can be defined as thematic, such as BL European Family Businesses or BL Equities Dividend, but the source of supply remains the same.

Fortunately, ESG is not a theme: it is an added value and a very useful tool in the analysis of a company or a country. For a fund management company, the policies inherent in the implementation of a responsible investment approach are structural and ensure a clear positioning in terms of voting, engagement and CSR (Corporate Social Responsibility) policies. In our view, outright exclusions are more shady. Apart from a few that are hard to argue against, they imply the injection of values and ethics with regard to which a fund management company does not necessarily have a legitimate position and the boundaries are not easily defined. But exclusions are only a small part of a much broader reflection.

The coherent construction of a responsible investment policy is vital. Ideally, it should be clear, transparent and communicated distinctly. This is a path that we have decided to take within our means, based on our investment philosophy and without losing sight of our value proposition: active conviction-based management.

In terms of implementation and communication, this positioning is meaningful but not fundamentally differentiating. Between prudent ambition and thematic sobriety... let's bet that this type of more global approach will find its place in the rapidly expanding world of sustainable and responsible finance.

(1) https://www.novethic.fr/finance-durable/publications/etude/market-data-fonds-durables-france-mars-2021.html
(2) Research in Finance, Invesco Study - June 2021
(3) https://www.greenpeace.org/luxembourg/fr/communiques-de-presse/11514/la-finance-pas-vraiment-verte-les-fonds-dinvestissement-durables-ne-font-pas-honneur-a-leur-nom-2/