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COP28 – best ESG funds

Want to invest for a greener future? Conference of the Parties (COP28) is a major climate change conference taking place in the United Arab Emirates (UAE). See the top three ESG fund managers we believe are best placed to help responsible investors.

Published on 08 Dec 20236 minute read

ESG investing: an overview

Progress on climate targets remains mixed, with a rising backlash against the move to net zero and emissions cuts. Nevertheless, considerable sums are being poured into decarbonisation efforts through the Inflation Reduction Act in the US and Fit for 55 in Europe.

Funds that target environmental solutions still have a long pathway for growth.

The road is likely to be bumpy. This was evident in 2022, with the MSCI World ESG (Environmental, Social and Governance) Leaders Index posting a worse return for the year than the MSCI World Index1. The war in Ukraine pushed up prices for oil and has highlighted the ongoing dependence on fossil fuels to meet energy needs. This benefited the energy giants, at a time when few other sectors did well. The relative performance of environmental funds struggled as a result.

However, in the longer term, the Ukraine crisis exposed the problem of relying on unstable foreign powers to meet domestic energy needs. Governments started to take energy security more seriously. This has prompted a flurry of fiscal spending programmes aimed at building the required infrastructure to support electrification.

In the US, the Inflation Reduction Act earmarked $370bn to advance the climate agenda2, while Europe’s Fit for 55 programme sets out plans to reduce net greenhouse gas emissions across the EU by at least 55% by 2030​.

Best ESG funds – sustainability insights

Environmental funds have put in a stronger performance this year3. It’s been a better year for technology companies, too, which often form an important part of sustainable funds. At the same time, many companies involved in addressing sustainability challenges are becoming more established. It used to be that environmental funds comprised mostly smaller, earlier stage businesses, which tended to struggle at times of economic weakness, but this is no longer the case.

Investing in the right areas is one of the most powerful things anyone can do to protect the planet.

It’s worth remembering that investing in green funds can make a significant difference. Research from campaign group Make My Money Matter shows that by ‘greening’ a pension – choosing more sustainable options for their investments – people can cut 21x more carbon than going vegetarian, giving up flying and switching energy provider.4

Green and ethical investing is likely to remain a multi-year trend given concerns over global warming, biodiversity and social inequities. Companies on the wrong side of these issues are likely to continue running into problems and those finding solutions could provide an investment opportunity.

This means that investors shouldn’t have to sacrifice returns for a cleaner planet and may even experience a tailwind or accelerated progress over the longer term. Some ethical funds may, by definition, have a limited investment universe; this may affect their performance.

These are the top three ESG fund managers from The Best™ Funds List we believe can help navigate this sector with skill (The Best™ Funds List is a trademark of Bestinvest).

1. Guinness Sustainable Energy

The fund aims to provide capital growth by investing in global companies involved in the generation, storage, efficiency and consumption of sustainable energy sources. These include solar, wind, hydro, geothermal, biofuels and biomass. Managers Will Riley and Jonathan Waghorn believe that over the next 20 years the sustainable energy sector will benefit from the combined effects of growing demand, improving economics, and support from the public and private sectors.

When selecting stocks likely to benefit from this growth they combine a top-down investment process, looking at the fundamental drivers of sustainable energy markets, with a bottom-up evaluation of company strengths including earnings sentiment.

2. Ninety One Global Environment

The fund aims to provide both capital and income growth by investing at least two-thirds of its assets in the shares of global companies that the managers believe contribute to positive environmental change through sustainable decarbonisation. Through their products and services, both are avoiding high carbon emissions and helping to address climate change in renewable energy, electrification or resource efficiency.

Managers Deirdre Cooper and Graeme Baker believe that these companies will enjoy a multi-year tailwind from global efforts to reduce carbon emissions through regulatory change, technological progress and consumer behaviour. The portfolio is highly concentrated, holding between 20 to 30 stocks, .

3. Baillie Gifford Responsible Global Equity Income

The Responsible Global Equity Income Fund goes beyond climate change, aiming to invest in companies growing sustainably and responsibly. It has shown itself to be a compelling option for income-seeking investors looking for a pragmatic, ethical portfolio.

Managed by the well-established team of Toby Ross, James Dow and Ross Mathison – and backed by the extensive analyst resources of Baillie Gifford – it looks to achieve growth in capital and income over a rolling five-year period and a higher yield than the Morgan Stanley Capital International All Country World Index (MSCI ACWI) index. It has been a strong and consistent performer, because of its focus on long-term dividend and earnings resilience.

The fund aims to invest in higher quality, cash generative businesses that are financially robust and growing sustainably. Current holdings include Novo Nordisk, Microsoft and heating and air conditioning group Watsco. This is a natural core holding for responsible portfolios and has one of the lowest fees in the sector.

Bestinvest can help simplify the fund selection process

Sifting through funds is a mammoth task that most people don’t have the time – or specialist knowledge – for. That’s why we created The Best™ Funds List. You can download your free copy of The™ Best Funds List now. If you’d like our expert review of your portfolio, it’s easy to arrange a free coaching session with no ongoing commitment.

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Important Information

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Past performance is not a guide to future performance.

The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any  direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.

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