Money Observer: How carbon-heavy are the most popular funds?

Following the recent introduction of Morningstar’s carbon risk rating by Morningstar, we reveal how carbon-heavy the most popular investment funds are

An increasing number of investors look to environmentally friendlier and more ethical ways of growing their money, and choosing the right funds is part of that process.

When choosing a fund, investors can invest in funds that are specifically ‘ethical’ or ‘responsible’. Alternatively, they can consider funds like Lindsell Train UK Equity Income that aren’t explicitly ethical but still tend to avoid miners, for example, because they prefer consumer brands and tech companies instead.

The Morningstar Carbon Risk Score looks at the underlying companies of a fund. But it can only evaluate the funds if it has enough data on at least 67 per cent of the portfolio, which is why a score is not available for all of the most-bought funds in the table below.

Funds with low levels of fossil fuel exposure get a ‘low carbon designation’. If they also have less than 7 per cent of their companies’ revenues derived from coal, oil and gas extraction and production, they will qualify for a low carbon risk score (below 10).

Hortense Bioy, director of passive strategies and sustainability research, says: ‘Sector exposures play a role in funds’ carbon score. Funds that invest largely in energy and utilities and the industrial sector have the highest carbon risk.

‘Those investing mostly in technology and healthcare have lower levels of carbon risk. This is the case for Fundsmith Equity and Janus Henderson Global Technology. Fundsmith Equity has 60 per cent exposure to technology and healthcare combined. This is double the exposure for the average fund in its category.’

A fund which is popular but scores less well is Artemis Global Income; it has high exposure (30 per cent) to the sectors with some of the highest carbon risk, namely energy, materials, and industrials. Bioy adds: ‘It also overweights those sectors relative to the average fund in the category. This partly explains the higher carbon risk score.’

Another fund that’s not doing well in the metric is Henderson China Opportunities. ‘The fund has similar sector exposure to its category peers, but its carbon risk score is higher. This could mean that the fund holds companies with higher unmanaged carbon risk than other companies,’ says Bioy.

Matt Coppin, manager of financial advice at ethical IFA Castlefield, points out: ‘Any metric or benchmark will be based on past information and isn’t really looking forward into how good a company is at transitioning to a low carbon economy.’

‘Perhaps one interesting way of looking how well a company is transitioning, would be to consider the amount of investment they are making into investigating lower carbon impact and how their revenue sources change over time.’

Top 18 most-bought funds Interactive Investor from 1 January to 2 May 2018 (below 10 is a ‘low carbon’ score):

carbon funds

This feature was originally published in Money Observer, 12 June 2018:

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