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Name: Sustainability Tilted funds

Investment funds which integrate sustainability issues into investment decision making

Brief description of Style

‘Sustainability Tilted’ funds consider (environmental and social) sustainability related issues when deciding where to invest.  They typically ‘overweight’ more sustainable companies and ‘underweight’ less sustainable companies.

These funds may also have some areas of exclusions and may work to encourage more sustainable business practices and standards through Stewardship / Responsible Ownership activity.

Funds of this kind often aim to reflect a named benchmark.

SRI approach applied

Fund managers in this SRI Style will typically be ‘overweight’ (more significantly invested in) companies that are considered to have high standards relative to their peers – and be ‘underweight’ (less significantly invested in) companies that are regarded as laggards, meaning that they may invest in all (or almost all) sectors.

Funds may focus on a specific issue or area – or be more broadly invested.

Tilted funds are likely to focus on how investee companies operate – rather than necessarily what they make or do.

Investments of this kind may use an index to dictate where they can invest (e.g. an MSCI index or the UN Global Compact).

These funds will not generally have a major focus on ‘solutions companies’ or ‘delivering positive impacts’ (see ‘Sustainability Themed’ funds for this).  Their work may, however, be supportive of the need to transition to higher sustainability standards as they reduce their level of investment in ‘sustainability laggards’.

They may have a significant focus on ‘responsible ownership’ (stewardship) and use their position as shareholder (part owners) to encourage higher sustainability standards.

For some funds this may be a core part of a well-resourced strategy where companies are only excluded if they fail to respond to requests to improve.

The ‘Policy’ and ‘Approaches’ filters, as well as text and links, on Fund EcoMarket help to explain these areas further.

SRI Issues

The core ‘issue’ for these funds is (environmental and social) ‘Sustainability’ – with higher standards being viewed as likely to support longer term business success.

Relevant issues include the management of climate risk, use of natural resources, employee practices, diversity and governance.

Funds in this group may exclude clearly harmful areas such as armaments companies, tobacco companies and coal companies – but may invest in oil companies (often with the aim of encouraging them to transition).

Variation across Style segment

To be in this SRI Style the manager must consider (forward looking) sustainability issues, however approach and resources vary.

Funds in this group may look ‘conventional’ – and for some (but not all) it is the ‘behind the scenes’ voting and engagement activity that differentiates them from other (non-sustainable) funds.

Some funds will exclude only a tiny fraction of their ‘universe’ based on ESG or sustainability scores, ratings or indices – others go further.

Responsible ownership activity varies between funds and fund managers.

Funds in this group that are marketed/promoted as being ‘sustainable’  can cause controversy when they invest in sectors that are inherently unsustainable.

Please use the filters on Fund EcoMarket to understand individual fund strategies.

Impact on investment strategy

Fund managers favour companies that manage sustainability and ESG issues better than their (‘mainstream’) peers but do not necessarily exclude laggards which means impact on stock selection is more around weightings than in/out decisions.

Who is this Style most likely to appeal to?

Useful for investors who want exposure to all or almost all sectors but with a bias towards companies that take sustainability issues seriously. Likely to be useful for clients who want to see investors putting pressure on companies (encouraging them to improve), although engagement activity varies.

Associated Styles

Some of these funds have much in common with ‘ESG Plus’ (where there is often more of a backward looking focus on ‘ESG risk mitigation’) and ‘Sustainability Themed’ funds – which typically focus more on projecting forward to focus on those industries that will prosper as sustainability increasingly takes centre stage.

Associated labels

Sustainability, responsible ownership (using share ownership to encourage higher standards), transition

 

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