Thematic funds or indexes, and ESG integration—a market trend on the rise?

In June 2019, this year, 2,832 funds proclaimed to use ESG criteria, of which 168 have been created during the 1st semester of 2019.

Thematic funds were notably started by Pictet Asset Management in the 2000’s—with their first fund focused on water. Today, this kind of investements represents for Pictet AM EUR 40bn AUM, declined on different themes. Over the past 20 years, 10 new themes have been created: Timber, Smartcity, Nutrition, Security, Biotech, Digital, etc.

Their scope ? Listed companies. Their targeted customer segments ? Retail, Insurance, Asset Managers, Pension funds, Banks…

Thematic ESG impact funds have today their own momentum. Why is it so ? Because a theme gives investement a purpose, easy to grasp for the investor. And because ESG issues are the very core of our today’s concerns. And although thematic investing had been around for 20 years now, it only represents a mere 14% of the USD 28tn ESG AUM—there is still a very huge potential for growth.

We can thus expect ESG Indexes to gain also more and more traction in the passive asset management sector.

But Thematic ESG funds also come with limitations. Their biggest current problem is probably that—paradoxically—thematic ESG funds doesn’t systematicaly integrate ESG criteria… It means that, despite the fact that the theme of a fund can be, e.g., a Social or Environmental topic, the companies or states listed in the fund could nevertheless either be involved in ESG controversies, or can have a very poor ESG rating.

Here, no doubt that transparency, and thus credibility, will be a key—to avoid the greenwashing / impactwashing drift. And, when they exist, ESG Labels could also help—even if they can certainly be improved… The EU is indeed working on sustainable finance labels, and also promote a greater transparency on the existing ESG indexes.

To overtake these current limitations, and become more massively adopted by the market, we think that Thematic ESG funds should thus:

  • Propose innovative themes, taking into account macro-economic trends;
  • Systematically integrate ESG criteria, in the companies and countries selection process;
  • Measure and report the ESG impact of the fund, on the environment and the society, i.e. its capability to deliver a real value for our human societies.

That’s why, to help our customers to achieve these goals, we created our own Thematic ESG Impact Funds Library, with 30+ innovative funds concepts, and our own proprietary ESG Impact rating framework. Interested ? Let’s start the discussion.

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