However, in some respects, Pictet’s Global Environmental Opportunities Fund is a hybrid product: it invests in companies that have a net positive environmental impact, yet the managers don’t classify it as an ESG fund; it is a thematic fund, but it uses the MSCI AC World index as its reference.
The fund deploys conventional stock analysis after identifying a scientifically-based universe of companies that, through their products or services, have a quantifiable net benefit to the environment.
“Investing to safeguard the planet doesn’t mean sacrificing returns,”, Marc-Olivier Buffle, senior product specialist for the fund, told FSA in a recent visit to Hong Kong.
The $2.14bn fund has generated 51.29% cumulative return during the past three years, outstripping its benchmark MSCI AC World index (43.25%) and its sector average (32.72%). It has outperformed the index quarterly 71% of the time since its inception in October 2014, according to FE Fundinfo data.
However, it is more volatile than both measures, with three-year annualised volatility of 13.69% compared with 11.27% for the index and 10.58% for the international equity fund average.
It might seem curious that the fund is not referenced against an ESG or environment themed index, but Buffle believes that the criteria of the former is too different from his fund’s composition and objectives, while the latter tend to be contrived and have little resonance with investors.
“Basically, investors want their fund to outperform a standard, recognisable index, such as the MSCI AC World,” he said.
Nevertheless, 97% of the fund is active (that is, with stock weightings different to the index) and 17% of holdings aren’t in the index at all.
The starting-point for the Geneva-based fund managers, Luciano Diana and Gabriel Micheli, is a “planetary boundaries” framework devised by the Stockholm Resilience Centre, which sets out the scientific consensus about nine environmental challenges that matter most.
These include climate change, ocean acidification, ozone depletion, freshwater use, land system change, atmospheric aerosol loading, chemical pollution, and two that have already far exceeded a “safe zone”, that is, bio-geochemical flows (which create so-called oxygen dead zones) and biodiversity destruction.
“We identify companies with small environmental footprints using the framework, by netting off the positive and negative contributions of their activities. Our investible universe of around 400 companies commercialise products with a positive impact on at least one planetary boundary,” said Buffle, who has a PhD from the Swiss Federal Institute of Aquatic Science and Technology.
Moreover, the “pure” exposure must be greater than 20% of a company’s revenues or gross profits.
Broadly, stocks can be put into one of seven categories: dematerialised economy, pollution control, waste management, energy efficiency, water supply, renewable energy and sustainable agriculture and forestry.
However, after the environmental auditing filter, the investment selection process becomes much more conventional.
Stocks are screened for risk management, valuation and operational metrics, and scored for business franchise and management quality to identify around 50 stocks for the portfolio, unconstrained by sector, market cap or region.
Businesses with secular revenue growth, wide economic moats and high returns on invested capital are preferred, and the fund managers are impressed with managers with a coherent strategy, strong execution capabilities and track record, according to Buffle.
“Financial attractiveness is especially important, which we define as a combination of stock valuation and earnings momentum,” he said.
In terms of risk to the fund’s performance, “short term and relative to standard global equity indexes, our various biases can lead to temporary relative volatility”, said Buffle.
Other funds have a similar strategy of explicitly linking positive environmental (or social and governance) impact with generating strong investment returns.
For instance, the Hermes Impact Opportunities Equity Fund invests in companies that aim to create a positive social or environmental effect through their products or services, and eventually become market leaders in their sectors.
“We try to identify companies in nascent industries that are likely to grow their business models to become mainstream companies in the future,” fund manager Tim Crockford told FSA last year.
Differentiating investments that have quantifiable impact from ESG and its many manifestations makes sense. The ESG criteria promoted by asset managers are often rather nebulous, and has led to confusion among investors and to fears of so-called greenwashing.
Recently, Hong Kong’s Securities and Futures Commission (SFC) published a list of 21 SFC-authorised funds that fulfil its ESG disclosure requirements.
Pictet Global Environmental Opportunities Fund vs MSCI AC World index and sector average