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A Look at the Thematic Funds That Offer a Sustainable Focus

Morningstar’s thematic funds taxonomy provides a new lens for evaluating funds with a sustainable focus.

In addition to a potential opportunity to boost returns, thematic funds provide a distinct way to identify and reduce risk. Specifically, when it comes to identifying ways to reduce ESG risk, investors can explore funds with different kinds of sustainable focus. This includes funds that focus on issues like alternative energy, clean technology, and water.

We outlined these types of funds in our Global Thematic Funds Landscape report, which introduced our taxonomy for classifying thematic funds. Of the numerous themes that the taxonomy identified, two of them—Resource Management and Energy Transition—include specific subthemes that reflect funds with a sustainable focus.

Though not every subtheme in these groups is indicative of sustainable investing, the ones that are represent a strong portion of the thematic fund universe. Here, we take a closer look at the funds available within these themes.

Leading Funds With a Sustainable Focus

Water funds and alternative energy funds account for the lion’s share of sustainable thematic funds, with about $3.2 billion assets under management for North American water funds and $1.1 billion AUM for North American alternative energy funds as of March 31, 2020. Other themes that make up a smaller portion of the thematic funds’ universe include clean tech, wind, rare resources, and energy transition.

The sheer length of time they’ve been around for is a driving reason for the prominence of water funds, which make up a plurality of funds under the Resource Management theme. The largest water funds in North America include:

  • Invesco Water Resources ETF, at $916.4 million
  • Invesco S&P Global Water ETF, at $566.6 million
  • AllianzGI Global Water P, at $550.8 million
  • First Trust Water ETF, at $449.8 million
  • Calvert Global Water A, at $341.7 million

Alternative energy funds, which seek to facilitate the transition to a low-carbon world, are also on the rise. Though these funds are particularly popular in Europe, they’re still a powerful presence in North America. The largest alternative energy funds in North America include:

  • iShares Global Clean Energy ETF, at $527.9 million
  • Invesco Wilderhill Clean Energy ETF, at $207.1 million
  • First Trust NASDAQ® Cln Edge® GrnEngyETF, at $148.1 million
  • VanEck Vectors Low Carbon Energy ETF, at $86.1 million
  • Invesco Global Clean Energy ETF, at $51.8 million

North American leaders in thematic funds with a sustainable focus include iShares, First Trust, and Invesco. Additionally, Invesco’s two water-focused funds are the only two sustainable funds that make the list of the largest 10 thematic funds in North America.

How Funds With a Sustainable Focus Are Managing ESG Risks

The Morningstar Sustainability Rating™ evaluates a fund’s ESG risks and enables investors to directly compare funds on this front. The rating measures funds on a scale of 1 to 5 globes, with 1 globe indicating high ESG risk and 5 globes indicating low ESG risk.

A few funds from the list of thematic funds that stand out on this front include:

  • iShares Global Clean Energy ETF, within the Alternative Energy theme, has $546.6 million in AUM and a 4-globe rating.
  • First Trust NASDAQ Cln Edge StGidIfsETF, in the Clean Tech category, holds $28.4 million in AUM and has a 5-globe rating.
  • Tortoise Global Water ESG, a Water-focused fund, holds $12.9 million in AUM and has a 5-globe rating. It also holds a Morningstar Analyst Rating™ of Bronze.
  • First Trust Global Wind Energy ETF, under the Wind theme, has $89.4 million in AUM and a 4-globe rating.

Understanding the Nuances of Investing With a Sustainable Focus

Though thematic funds are often used with the hopes of boosting returns over the investment period, they can also help investors reduce portfolio risk—including ESG risk.

And by understanding the different ways that ESG risk can take shape according to funds’ different focuses, investors can be more intentional about where they put their money and the ESG factors that funds are prioritizing. For instance, they can replace traditional energy sector exposure with alternative energy funds.

For the full analysis of thematic funds around the world, download our report.
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