Sustainable funds: awareness of social issues on the rise
Sustainable funds continue to be popular. However, while predominantly geared towards green issues, their focus rarely extends to social aspects. This not least because it is challenging to include them, a new study by the Lucerne University of Applied Sciences and Arts finds.
Sustainable mutual funds continue to grow in popularity. In the past year, the number of mutual funds offered in Switzerland has grown by 15 per cent to 2,155, or to five times the number available five years ago. Despite this growth, “sustainables” continue to be a niche market, making up only 22 per cent of all mutual funds on the Swiss market (figure 1). However, the latest capital flows clearly indicate that eco-social investments are highly popular with investors: in the past year, more than 90 per cent of newly invested assets went towards sustainable vehicles, though not all dimensions of sustainability are equally reflected in the funds. This is one of the findings of the latest Sustainable Investments Study by the Lucerne University of Applied Sciences and Arts (HSLU).
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Figure 1: Number of sustainable mutual funds compared to conventional mutual funds in Switzerland
In mid-2023, Swiss investors have access to 2,155 sustainable mutual funds. This amounts to 22 per cent of all funds on the market. The remaining 78 per cent of funds position themselves as conventional investment opportunities.
Social sustainability criteria difficult to measure
While 94 per cent of sustainable funds meet the minimum standards set by the industry association Asset Management Association Switzerland AMAS, the 2,155 sustainable funds offered in Switzerland predominantly focus on environmental issues such as climate risks. In contrast, social criteria are not widely being considered. Only assessing compliance with basic human and labour rights has become standard practice: sustainable funds screen for compliance with the established UN and OECD norms considerably more often than conventional funds (figure 2).
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Figure 2: Share of sustainable mutual funds compared to share of conventional mutual funds that consider compliance with social standards in portfolio companies
Sustainable mutual funds screen their portfolio companies for compliance with internationally recognised social norms more often than their conventional counterparts, as shown here by the example of the principles outlined in the UN Global Compact (UNGC) and the OECD Guidelines.
“However, identifying social norms violations in companies is challenging and the results are subjective,” says Professor Manfred Stüttgen, who co-authored the study. Not even specialised rating agencies always see eye to eye, and given the differences in methodology, the diverging results do not come as a surprise. Renowned rating agencies find that a clear majority of sustainable funds are not invested in companies that violate international social norms (figure 3), while twelve per cent are unanimously found to violate them. Brian Mattmann, co-author of the study, explains: “It’s vital we understand the models used by the rating agencies to correctly interpret the companies’ violations of international standards,” adding that investors use different approaches to address these violations, and that exclusion is not always the best strategy. According to Mattmann, active stewardship can be more effective in combating dubious corporate practices.“ However, in the current discourse, such violations can easily lead to unjustified accusations of greenwashing,” says the HSLU lecturer.
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Figure 3: Screening of sustainable funds for portfolio holdings that comply with the United Nations Global Compact or OECD Guidelines
Renowned rating agencies find that a clear majority of sustainable funds are invested in companies that are compliant with international social norms. However, they agree that twelve per cent of sustainable funds are exposed to companies that are non-compliant with social norms.
Social issues as an investment opportunity?
A niche segment of some fifty funds selects their investments according to social factors. These funds consider themes such as population aging, education, social progress, and diversity to be investment opportunities. These thematic funds often align themselves with the United Nation’s 17 Sustainable Development Goals for a more sustainable world economy. However, social themes can be difficult to capture as a growth opportunity; unlike with climate and environmental funds, investors cannot simply invest in a specific technology or product.
Banks need to start talking about sustainable investments
Whatever the case, the trend towards more sustainable investments is set to gain additional momentum in 2024: as per the Swiss Bankers Association’s new self-regulation, banks will be obliged to survey their clients’ sustainability preferences and to offer suitable investment solutions going forward. The banks are currently implementing this new requirement through sustainability skills training. Stüttgen is optimistic: “This key reform within the Swiss banking system will likely deliver another major boost to the offering of sustainable funds.”
Various rankings for sustainable mutual funds
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The fifty largest providers of sustainable mutual funds in Switzerland (in million CHF, as at 30 June 2023/2022, in brackets after provider: change in ranking vs. mid-2022, in brackets to the right: asset growth in per cent vs. mid-2022)
The fifty largest Swiss players in the sustainable mutual funds segment in Switzerland (in million CHF, as at 30 June 2023/2022, in brackets after provider: change in ranking vs. mid-2022, in brackets to the right: asset growth in per cent vs. mid-2022)
Providers of sustainable thematic funds focusing on social issues (in million CHF, as at 30 June 2023, in brackets after provider: Number of funds with a thematic focus on social issues)
2023 IFZ Sustainable Investments Study
The annually published IFZ Sustainable Investments Study of the Lucerne University of Applied Sciences and Arts investigates sustainable investment funds licensed for distribution in Switzerland. This year’s study focuses on sustainable funds and social responsibility.
The 300-page “2023 IFZ Sustainable Investments Study. Sustainable Funds and Social Responsibility” is available for order as a booklet in German from ifz@hslu.ch for CHF 190.