The growth areas in sustainable funds continue to evolve and increase in importance as multiple drivers shape the opportunity presented to investors.
Consumer behaviour, government actions and technological progress are just three of the drivers behind the development and growth in areas for sustainable fund managers and investors.
Among the newest areas where growth opportunities lie are:
- Decarbonisation
- Climate adaptation
- Pollution and water management
- Healthcare impact
- Financial inclusion
- Digital inclusion
- Access to education.
Decarbonisation is the term used for removal or reduction of carbon dioxide output into the atmosphere. Decarbonisation is achieved by switching to usage of low carbon energy sources.
In response to the 2015 Paris Agreement, many governments and business leaders set targets and made commitments to reduce carbon emissions, declaring their intention to become carbon neutral by 2050.
Climate adaptation relates to actions that protect against the impacts of climate change – this includes reacting to the changes already seen and preparing for what will happen in the future.
For example, in the UK the government’s approach to climate adaptation include:
- building new flood defences to protect against rising sea levels;
- planning for more green spaces in urban areas to help keep them cool and planting more drought-resistant crops; and
- building infrastructure that can withstand expected climate impacts such as extreme heat and flooding.
Like many industries and sectors, organisations operating in the healthcare sector are increasingly focused on sustainability as an essential part of their activities.
Financial inclusion is defined by the World Bank as individuals and businesses having access to useful, affordable financial products and services (transactions, payments, savings, credit and insurance) that meet their needs and are delivered in a responsible and sustainable way.
When it comes to digital inclusion, greater access to digital services and solutions is an important part of the UN sustainable development goals, a set of interlinked targets designed to be a blueprint for peace and prosperity for people and the planet.
Typically, there are four components of digital inclusion:
- Access: whether an individual has access to or uses digital technology, such as the internet.
- Quality of access: even if two people have access to or use digital technology, the quality of their access/use may be very different.
- Digital skills: digital technology use requires literacy to be able to participate, categorised as basic, intermediate and advanced skills.
- Affordability: digital technology use can be very expensive relative to household income.
Education is essential to reducing poverty and promoting sustainable economic growth, but not everyone has access to quality education.
The UN's SDGs include “quality education” as one of the 17 highest priorities.
As with all the growth areas, investors play a role, by directing capital towards companies and governments that are addressing issues. It presents opportunities to investors who want to invest in sectors developing the necessary infrastructure and technology while also seeking attractive financial returns.
Performance indicators
But sustainable funds have had a bit of a mixed performance over the years.
In the first quarter for 2024, global sustainable funds rebounded slightly by attracting nearly $900mn (£704mn) of net new money, compared with small, restated outflows of $88mn in Q4 2023, according to the most recent Morningstar Global Sustainable Fund Flows report.
Across various asset classes, there was a mixed bag of performances.
Equity, traditionally a stronghold, saw a downturn with outflows among sustainable equity funds totalling $1.3bn. This contrasted with the rebound of flows into conventional equity funds, which attracted $12bn of net new money in the first quarter of this year after losing $12.7bn in the previous quarter.
