Sustainable investing continues to increase in popularity. Once upon a time, it was seen as a consideration only for philanthropic investors wanting to leave a legacy for future generations. But now, thanks to evidence that suggests investing with ESG criteria in mind leads to greater returns, investors do not have to choose between ethics and profits.
Morningstar fund analysts have been providing sustainability ratings for funds since 2016. But the scope of sustainable investing is constantly evolving. Now Governments are encouraging corporates to lower their, and their global supply chain’s, carbon emissions. As a result, companies not ready for this change may be caught, and investors need to be aware.
We’ve recently seen many big pension funds launch low-carbon mandates, while others have completely divested their carbon-specific investments. “And then you’ve seen asset managers like BlackRock really pressuring companies to have better disclosure around climate risk,” notes Howard Kelly, global head of research at Morningstar.
Morningstar analysts now offer a low carbon designation for retail funds in the UK. Launched at last week’s Morningstar Investment Conference, this rating, which sits alongside the sustainability scores on a fund page, allow investors to find funds whose investee companies are positioned for the transition to a low carbon environment.
“It’s not just looking at the carbon emissions of a company, but how well is the company managing that risk,” says Kelly. “Some companies may not even be able to transition to a low carbon environment.”
The rating is based on underlying company data provided by Sustainalytics, and is compiled through two scores: a portfolio carbon risk score; and a fossil fuel involvement score. The ratings are asset-weighted – so given for both equity and corporate bond holdings – and funds for which we have at least two-thirds of its assets are all given a score.
Those with a carbon risk score of below 10, out of 100, and a fossil fuel exposure of less than 7% will earn a low-carbon designation. “This is a very easy way for you to rank funds in our universe, top to bottom, in terms of carbon exposure,” Kelly adds.
Below, we highlight the five top-rated funds with low carbon scores.
Fundsmith Equity
The Morningstar Gold Rated Fundsmith Equity is an ever-popular port of call for investors, having well outperformed its peers in the eight years Terry Smith has been running it. It’s been in the top three performers in its Morningstar Global Equity Large Cap Blend category in four of the past seven calendar years.
And its legion of fans will be pleased to know that it also now holds the low carbon designation. It scores just 3.10 on carbon risk and has 0% involvement in fossil fuels. The latter would be accounted for due to Smith’s aversion to energy firms in general – he holds zero.
Smith’s investment style is to buy high-quality businesses at reasonable valuations and to hold for the long term, ideally forever. His portfolio consists of just 28 stocks. It also holds four globes out of five in terms of sustainability.
Jupiter European
Alexander Darwall is another well-respected fund manager that has a concentrated portfolios – of 35 firms – but has no exposure to energy stocks. As a result, his Gold Rated Jupiter European offering scores 0% for fossil fuel involvement.
The carbon risk score is 4.01; despite this, the fund only has one globe out of a possible five, showing the low-carbon designation does not only single out sustainable mandates for inclusion.
Darwall likes companies he can understand, and those with a dominant market position that have, thereby, pricing power.
Lindsell Train UK Equity
Like the previous two, the Gold Rated Lindsell Train UK Equity scores 0% for fossil fuel involvement, with a slightly higher carbon risk score of 5.2.
The fund is an excellent choice for ethical investors, as it already holds five globes for sustainability. It’s also a top performer, producing annualised returns of almost 15% over a 10-year period.
Train, another high-conviction, buy-and-hold investor, looks for high-quality firms with high and sustainable returns on equity, show low capital intensity and are cash generative.
Artemis Global Select
The Silver Rated Artemis Global Select fund, managed by Simon Edelsten, has a carbon risk score of 5.31 and fossil fuel involvement score of 2.4%. It also holds four globes on its sustainability rating.
A growth-oriented strategy, the trio of managers, which also include Alex Illingworth and Rosanna Burcheri, still pay heed to valuations. But their holdings are poised to benefit from long-term secular growth trends that the managers identify.
They are selective and are willing to hold up to a fifth of the fund’s £82 million in cash if necessary.
Royal London Sustainable Leaders
The only sustainable mandate in the list is Royal London’s Sustainable Leaders Trust, which has a Bronze analyst rating. The fund’s carbon risk score is 6.34, while its fossil fuel involvement is 1.62%. It also holds five globes for sustainability, unsurprisingly.
The fund, managed by Mike Fox for the past 15 years, looks to invest in companies that have a positive effect on the environment, human welfare and quality of life. It also likes companies whose management are making above-average efforts in corporate responsibility.
While the fund sits in the UK All Companies sector, its largest holding is Amazon (AMZN), and Microsoft (MSFT) and Alphabet (GOOGL) are in the top 10.
