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Sustainable Funds You Should Invest In This Year

BY

Johny Telloni
sustainable funds

This year, sustainable funds have shone brightly despite economic ups and downs. The Morgan Stanley Institute for Sustainable Investing found they beat traditional funds in 2023. These eco-friendly investments made about 12.6% in returns, which is almost 50% more than the 8.6% of traditional funds. When it comes to investing in eco-friendly stocks, sustainable funds are an excellent way to go. These types of funds focus on companies that prioritize environmental, social, and governance (ESG) factors alongside financial performance. By supporting sustainable funds, investors can contribute to the growth of environmentally responsible businesses while also potentially earning strong returns. These funds help grow businesses that are good for the planet and can also make you money, making it a win-win situation. Sustainable funds typically invest in a diverse range of industries, from renewable energy and clean technology to sustainable agriculture and eco-friendly consumer goods. They often use a combination of quantitative and qualitative methods to evaluate companies based on their ESG practices, such as carbon footprint reduction, diversity and inclusion initiatives, and supply chain transparency. Responsible investing is all about aligning your financial goals with your values, and sustainable funds offer a way to do just that. By investing in sustainable funds, individuals can contribute to a more environmentally conscious future while also building a strong financial foundation for themselves.

People keep wanting to invest in sustainable options. In 2022, sustainable funds grew by 15%, reaching $3.4 trillion. This makes up about 7.2% of all money invested globally. It shows how important it is to think about the environment, society, and corporate governance when making investment choices.

Key Takeaways

  • Sustainable funds outperformed traditional funds by a wide margin in 2023, generating median returns of 12.6% versus 8.6%.
  • Sustainable fund AUM reached $3.4 trillion, accounting for 7.2% of global AUM, reflecting strong investor demand.
  • Sustainable equity funds recorded median returns of 16.7%, outpacing traditional equity funds at 14.4%.
  • Sustainable fixed-income funds yielded median returns of 10%, compared to 6.4% for traditional fixed-income funds.
  • Sustainable funds investing in the Americas were overweight in the technology sector, driving outperformance.

What are Sustainable Funds?

Sustainable investing is all about using environmental, social, and governance (ESG) factors in investment choices. These funds put money into companies and projects that care for the planet and help society. They aim to make money and make a positive change at the same time.

Defining Sustainable Investing

This kind of investing looks for ways to make money and protect the planet and people. It looks at how companies act on the environment, treat people, and run themselves. Investors want to back companies that work on clean energy, support diversity, or have good supply chains.

The Rise of ESG Funds

More ESG funds and ETFs are coming out as people want to invest in a sustainable way. ESG funds let investors put money into companies that share their values and might make good money. This shows that thinking about ESG can lead to strong investments and a better future.

Sustainable Funds’ Performance in 2023

Investors have been watching sustainable funds closely in 2023. The Morgan Stanley Institute for Sustainable Investing found that these funds beat traditional ones in all major areas. They made 6.9% in the first half, which is 50% more than traditional funds made.

Outperforming Traditional Funds

Sustainable funds have been doing better for a long time. They make more money than traditional funds. This is because they focus on areas that are moving towards being more sustainable.

Sector Exposure and Performance Drivers

Sustainable funds did well in 2023 because they avoided the poor-performing Energy and Financials sectors. They made money from sectors like Renewable Energy and Green Technology instead.

Sector Sustainable Funds’ Allocation Traditional Funds’ Allocation Relative Performance
Energy 5% 15% Underperformed
Financials 8% 17% Underperformed
Renewable Energy 12% 3% Outperformed
Green Technology 16% 8% Outperformed

Sustainable funds did well because they focus on areas that are set to grow in a sustainable economy. As more investors see the benefits of sustainable investing, demand for these funds will keep going up. This will help them grow and perform better in the future.

Asset Class Breakdown

In recent years, sustainable investing has shown strong results. In 2023, sustainable equity funds led the way, with returns of 16.7%. They beat traditional funds by 2.3 percentage points. These ESG equity funds did well in sectors like Industrials, Technology, and Health Care.

On the fixed-income side, sustainable fixed-income funds also did well, with a 10% return in 2023. Traditional funds only made 6.4%. Investors are now choosing ESG bonds more often to match their values.

More people are choosing sustainable investing, showing a big shift towards responsible finance. As investors focus on ESG factors, sustainable funds are expected to grow and change more.

Sustainable Funds’ Growth in Assets

Investors kept their eyes on sustainable funds in 2023, making them more popular. These funds grew by 15% to reach $3.4 trillion. Now, sustainable funds make up 7.2% of all money managed globally.

The first half of the year was key for growth. Most of the $136 billion ESG funds inflows in 2023 happened in the first six months.

In 2021, many sustainable funds beat their benchmarks in returns. From 2004 to 2018, they showed less risk and similar returns to traditional funds.

Metric Sustainable Funds Traditional Funds
2020 Median Total Return (Equity) 4.3% outperformance –
2020 Median Total Return (Taxable Bond) 0.9% outperformance –
2018 Equity Indexes vs. Benchmarks No statistical difference –
2018 Private Impact Funds IRR 6.9% 8.1%

But 2023 showed a change. Sustainable equity funds underperformed their traditional peers. Sustainable funds’ growth slowed down, dropping by 1.7% in the last quarter. Meanwhile, U.S. funds saw a 0.2% increase.

Sustainable Funds Growth

Regional Differences

Sustainable investing varies a lot across regions. Most, about 87%, of sustainable fund assets are in Europe. Europe saw $146 billion in new money, or 5.8% of what they had before.

In the Americas, sustainable funds focus more on Technology, making up 29% of their investments. This is more than traditional funds, at 23%. This focus helped the Americas beat other regions, with a 21.3% gain. Europe’s sustainable funds gained 14.1%, and global ones 12.3%.

Europe-Domiciled Sustainable Funds

Europe leads in sustainable investing, with strong performance and growth. Its funds focus more on Health Care, showing a focus on sustainability.

Sustainable Funds in the Americas

Sustainable funds in the Americas focus on Technology, making up 29% of their investments. This focus helped the region do better than Europe and the world in 2023.

Understanding the differences in sustainable investing is key. As this field changes, investors need to watch these differences. This helps them make choices that fit their goals and values.

sustainable funds’ Sector Allocations

Sustainable investing focuses a lot on where funds put their money. In 2023, sustainable equity funds put more money into sectors like Industrials, Technology, and Health Care. This has helped them do better than traditional funds.

They avoided sectors like Energy and Financials that did poorly. This smart choice added to their success.

Sector Sustainable Funds Traditional Funds
Industrials 18% 13%
Technology 23% 19%
Health Care 15% 12%
Energy 5% 9%
Financials 10% 15%

Sectors like Industrials, Technology, and Health Care have helped sustainable equity funds do well in 2023. These sectors have more sustainable and ESG-friendly companies. As sustainable funds keep changing, we’ll need to watch how this affects their success and market position.

Best-Performing Sustainable Funds

Investors are now focusing more on sustainability and ESG factors. The Nuveen Winslow Large-Cap Growth ESG ETF and the iShares ESG Aware MSCI USA Growth ETF are top picks. They returned 40.69% and 40.06% respectively.

The FlexShares ESG & Climate US Large Cap Core Index Fund also did well, with a 27.68% return. These funds show they can make money and match investor values.

Fund Name 2023 Performance
Nuveen Winslow Large-Cap Growth ESG ETF 40.69%
iShares ESG Aware MSCI USA Growth ETF 40.06%
FlexShares ESG & Climate US Large Cap Core Index Fund 27.68%
Harbor Human Capital Factor US Large Cap ETF 26.88%
Harbor Human Capital Factor Unconstrained ETF 26.61%
Franklin Responsibly Sourced Gold ETF 25.62%
Xtrackers S&P 500 Growth ESG ETF 24.75%
Putnam Sustainable Leaders ETF 24.47%

These top sustainable funds show they can make money and follow ESG principles. As more investors want high-performing ESG funds, it’s key to look at their performance and strategies. This helps investors see if they meet their goals and values.

Low-Cost Sustainable ETFs

Many investors worry about the cost of sustainable investing. Luckily, low-cost ESG ETFs are now more accessible. They let you invest in a way that matches your values without spending a lot.

The TCW Transform 500 ETF, Xtrackers MSCI USA Climate Action Equity ETF, and iShares ESG Screened S&P 500 ETF are some top picks. They have low net expense ratios under 0.15%. This makes them great for those new to low-cost ESG ETFs and affordable sustainable funds.

In 2022, the top five sustainable ETFs were:

  • VanEck Sustainable World Equal Weight UCITS ETF (ISIN: NL0010408704)
  • Rize Sustainable Future of Food UCITS ETF (ISIN: IE00BLRPQH31)
  • VanEck Morningstar US Sustainable Wide Moat UCITS ETF (ISIN: IE00BQQP9H09)
  • HSBC Europe Sustainable Equity UCITS ETF (ISIN: IE00BKY55W78)
  • VanEck Sustainable Future of Food UCITS ETF (ISIN: IE0005B8WVT6)

These funds offer a variety of sustainable investment choices. They range from global equity to specific sectors. Their low costs make them a great way to start with low-cost ESG ETFs and affordable sustainable funds.

low-cost ESG ETFs

The world of sustainable investing is growing. We can expect to see more low-cost ESG ETFs and affordable sustainable funds soon. By keeping up with new options, investors can make portfolios that meet their financial goals and values.

Factors to Consider When Investing

Investing in sustainable funds means looking at more than just how much money you might make. As an investor, I must think about the trade-offs between active ESG funds and passive ESG funds. I also need to make sure the fund fits my personal ESG investing values and sustainable investing goals.

Active vs. Passive Management

Active ESG funds usually have higher fees than passive ESG funds. Active funds might do better in the market, but the fees can lower your returns. For those watching their costs, passive ESG funds or ESG ETFs could be a smart choice for sustainable investing.

Aligning with Your Values

It’s key to pick ESG funds that match my own ESG investing values and sustainable investing goals. This might mean choosing funds focused on the environment, like renewable energy and fighting climate change. Or, it could mean picking funds that support social causes, like diversity and inclusion. Finding an ESG fund that shares my values is more important than just looking for the cheapest option.

By thinking about both the type of management and my values, I can create a sustainable investment portfolio. This portfolio will help me meet my financial goals and support my aim to make a positive change in the world.

Measuring Impact

As an investor in sustainable funds, knowing the real-world impact of your money is key. Many top sustainable funds now share their impact reports. These reports show how they work on sustainability and their results.

These reports talk about how the fund talks to companies and votes on important issues. They also cover things like the fund’s carbon footprint and water use. Some even share how their investments help people, like creating jobs or improving services.

By looking at these reports, you can see how your ESG funds impact the world. This info helps you choose investments that match your values and goals for a better future.

But, it’s hard to measure the impact of sustainable investing exactly. There are many ways to look at impact, and leaders are working on making it clearer. Look for funds that are open about their sustainability work and share real data on their impact.

Measuring your sustainable investments’ impact is key to making sure your money helps. By picking funds that are open and share their impact, you help drive change with your money.

Robo-Advisors for Sustainable Investing

Investors looking to add sustainable investments to their portfolio can use robo-advisors. These online platforms make it easy to invest in socially responsible ways. They use technology to pick investments that match your values without extra cost.

Big names like Betterment, Ellevest, and Axos Invest are leading in robo-advisors ESG and automated sustainable investing. They use smart algorithms to pick investments based on ESG criteria. This helps investors make money while sticking to their ethical beliefs.

Betterment has three SRI portfolios that are more eco-friendly than usual. Ellevest focuses on women-owned businesses and underrepresented groups, along with ESG ETFs.

The popularity of robo-advisors ESG shows people want investments that are good for the planet and still make money. Robo-advisors offer easy access to ESG portfolios. You don’t need to know a lot about finance or have a lot of money to start.

The robo-advisors ESG and automated sustainable investing market is growing. This means more options for investors who care about the planet. Technology is making it easier for more people to invest in a way that’s good for the world.

Conclusion

The future of sustainable investing looks bright. In 2023, ESG funds did well and more people want to invest in them. This shows sustainable investing will be key in the investment world.

Now, there are many ways to invest sustainably, like green bonds and impact funds. These options let investors match their money with their values and goals. As more people see the long-term gains of investing in sustainable companies, the outlook is good.

But, there are still issues like greenwashing and not having clear ESG metrics. Yet, I believe sustainable investing will keep growing. This is thanks to more investors, new tech, and a focus on being responsible globally. I’m looking forward to seeing how it changes and the good it will do for our planet.

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