Key points in a nutshell:
- ESG funds are investment funds that invest in companies that align with ESG criteria.
- The ESG criteria assess a company's sustainability practices in terms of environmental, social, and governance factors, focusing on risks and their impact on the company itself.
- ESG funds can apply various sustainable investing tools, such as positive and negative screening, to filter out companies.
- In addition to ESG funds, there are other sustainable investment options, such as impact-oriented funds that consider the positive impact of companies on the environment, society, and the UN’s Sustainable Development Goals (SDGs). Examples of these are impact investing funds and SDG-oriented funds.
- SDG-oriented funds, such as radicant’s Swiss Sustainable Equities Fund, offer you as an investor the opportunity to invest in companies that have a positive impact on the environment and society.
1. What are ESG funds?
ESG funds are a specific type of investment funds that consider environmental, social, and governance aspects when selecting investments.
They belong to the category of sustainable investments that go beyond purely financial criteria. They take ethical, social, and ecological factors into account when allocating capital.
ESG funds are often referred to as "SFDR Article 8" funds or "light green" funds according to the EU Sustainable Finance Disclosure Regulation (SFDR).
2. What are the ESG criteria?
The ESG criteria – environment, social, and governance – are non-financial aspects used to assess a company's sustainability practices. They mainly identify potential risks and opportunities for companies. These criteria evaluate how various ESG factors, such as environmental factors influence a company, how these factors are managed, and their potential impact on the company's financial performance. This perspective is often referred to as financial or single materiality.
ESG criteria also play a significant role in ESG funds as they form the framework for investment selection and evaluation. ESG criteria data can come from companies or providers of ESG data.
The following breakdown gives you a comprehensive overview of the three ESG criteria:
Environment:
- Environmental aspects include criteria such as carbon emissions, water usage, and the protection of biodiversity. How a company addresses these points is crucial for its environmental responsibility, for example by measuring and reducing its carbon footprint and water consumption, improving efficiency, or setting reduction targets.
- Energy efficiency, waste management, and recycling are other essential aspects. Managing climate-related risks, such as implementing emergency plans for natural disasters like floods, is also important.
Social:
- Social aspects within a company deal with important issues such as taking care of the company’s human capital and protecting personal data. A company should pay special attention to these issues and ensure it respects employees' rights, promotes health and safety at the workplace, and considers impacts on local communities.
- Designing safe working conditions, providing of further training and continuing education and promoting diversity and inclusion also play a crucial role. A focus on human rights compliance among employees and at all production sites is essential.
Governance:
- Governance considers both internal and external factors, such as fair compensation models, transparency and active anti-corruption measures. It's crucial for a company to manage these areas carefully and for example establish ethical principles that are monitored by the board.
- Additionally, holistic corporate governance is oriented toward considering the interests of various stakeholders, such as investors and shareholders. This includes protecting shareholders' rights, such as voting on topics like climate strategies and goals, known as a "Say on Climate."
3. How do ESG funds work, and what role do ESG ratings play?
The ESG criteria of ESG funds are assessed and often expressed through ESG ratings. These ratings are compiled by data providers or financial institutions.
ESG ratings often vary for individual companies as they are partially based on different data or models. ESG ratings should thus be understood as a form of "opinion" aiming to create a better portfolio.
Funds can incorporate ESG ratings in various ways. For instance, they might follow certain criteria by avoiding investments in companies with low ratings.
The tools of sustainable investing determine how companies are selected or filtered out for investments. These tools can be applied individually or in combination with ESG funds. Here's an overview:
- Exclusions: Companies are excluded due to certain controversial activities. This could involve non-compliance with certain standards or norms, such as the UN Global Compact principles or OECD guidelines. Other activities could relate to tobacco, palm oil, weapons production, nuclear energy, or others.
- Negative screening: This involves avoiding companies active in areas such as fossil fuels, weapons production, or human rights violations.
- Positive screening: Here, funds intentionally invest in companies with a better ESG performance. A minimum threshold, which must be adhered to, is usually defined.
- Best-in-class: This is also a form of positive screening, but here investments are only made in the best-performing companies within a sector – the industrial sector, for example.
- ESG Integration: This involves incorporating ESG factors in evaluating companies and investment decisions to better manage risks and identify opportunities.
There are also tools applied after the investment, such as:
- Engagement: Investors engage in direct dialogues with companies to improve specific sustainability practices or ESG criteria. Such conversations can also be held together with other investors in so-called investor associations.
- Voting: Investors can exercise their shareholder rights through voting. They can vote on certain topics at the shareholder meetings of companies or submit proposals for voting.
4. How do ESG funds differ from other sustainable funds?
ESG funds primarily focus on financial materiality, also known as single materiality. This pertains to the impact of ESG factors on a company and how the company manages these aspects. An example would be how climate change affects a company.
Other funds may emphasise sustainability to a greater extent and prioritise impact. They not only consider how environmental and social factors affect a company but also how companies impact the environment and society. These include impact-oriented funds. This deeper understanding, combined with the previously mentioned approach, is known as "double materiality," which form the basis of the EU regulations for sustainable financial investments.
5. Alternatives to ESG funds: What's available?
Apart from ESG funds, there are other sustainable investment options like impact investing funds or SDG-oriented funds.
Impact investing funds invest in companies that focus on achieving measurable positive social and environmental impacts. SDG-oriented funds, on the other hand, align with the UNs' Sustainable Development Goals (SDGs).
As an investor, you can invest in precisely such funds from CHF 1,000 at radicant, Switzerland's first digital sustainability bank. All our funds adhere to the UN's 17 SDGs, ensuring that your investments contribute positively to our planet and our society. Additionally, all radicant’s SDG-oriented funds are classified under the EU’s Sustainable Finance Disclosure Regulation as "SFDR Article 9" or "dark green" funds, indicating they pursue both financial and sustainable goals.
Thanks to radicant's rating system, you'll always know how we evaluate the impact on the environment and society of the companies which are in your portfolio. Do you want to learn more? Feel free to visit our investing page
6. Conclusion: ESG funds
ESG funds offer a way to invest in companies committed to sustainability, while delivering attractive returns and minimizing investment risks. They are guided by ESG criteria to ensure risk reduction for investors.
Other sustainable investment options, such as impact investing funds and SDG-oriented funds, go a step further, making a positive contribution to a sustainable future on our planet.
ESG investing and SDG investing primarily differ in their objectives. While ESG investing focuses on minimising risks related to environmental and social issues for a company (known as "single materiality"), SDG investing also considers a company's direct impacts on these issues.
If you want to start with truly sustainable banking and investing, then radicant is what you’re looking for.
radicant is Switzerland's first digital sustainability bank. With radicant's SDG-oriented funds, you exclusively invest in companies actively contributing to the UN's 17 SDGs.
radicant goes beyond the exclusion of controversial industries, providing you with insight into the measurable impact of companies on the environment and society with its rating system. Our portfolio managers ensure that your money is not only invested sustainably, but also successfully and diversely. And you can start your journey with as little as CHF 1,000.
What’s more, with radicant you benefit from 100% sustainable banking. You'll receive a physical card made from recycled plastic, and our app features a real-time carbon tracker to monitor your carbon footprint. A portion of our customer deposits is invested in green bonds, financing sustainable initiatives around the globe.
Join us in achieving the UN's 17 SDGs and open your radicant account today – it takes less than 5 minutes.
