In the world of investment a commitment to sustainability has become increasingly important. While sustainability can encompass many areas, in investing one of the key ways of going “green” is with “green equity funds”.
“A green equity fund is one that provides equity finance to companies and investment vehicles that actively support sustainability through the prevention of greenhouse gas emissions or similar technology to decelerate climate change,” says Grit Young, M&A partner, EY Ireland. “They are a specialised product which appeal to those investors who have a real focus on Environmental, Social and Governance (ESG) outcomes.”
She says that green equity fund managers are responsible not only for the return on investment, but also their “ability to achieve specific climate goals such as the reduction of greenhouse gas emissions” .
As part of the European Green Deal – the European Commission’s strategy to address climate change and achieve net zero emissions by 2050 – the Sustainable Finances Disclosure Regulation (SFDR) provides increased transparency for investors so that they can understand how committed a fund is to ESG investing.
Shay Lydon, partner, asset management and investment funds group, Matheson, says: "One particular feature of SFDR has been the introduction of what have been colloquially referred to as 'light green' funds (pursuant to Article 8 of SFDR) and 'dark green' funds (pursuant to Article 9 of SFDR)."
Light green funds promote governmental responsibility in companies, and environmentally friendly or socially responsible assets, says Lydon. These funds may have a variety of aims, including capital appreciation. However, “dark green funds only make investments that contribute to environmental objectives, social objectives or social advancement”.
“These funds cannot invest in their chosen objective to the detriment of the other objectives listed. For example, these funds could invest in a company building wind farms – but not if the company breached equality requirements in its employment conditions.”
How prevalent are green equity funds?
Young says: "There are thousands of green equity funds in Europe alone and they are rapidly growing in popularity. Greater infrastructure around these funds is also starting to emerge so that investors can have greater certainty that their money is being invested responsibly, with industry and professional bodies playing a role in this."
Pros and cons
According to Lydon, an industry survey of Irish funds members conducted in June 2021 indicated that about 17 per cent of Irish funds are green equity funds (15 per cent light green and 2 per cent dark green funds).
Are green equity funds working? In the fight for climate change, are green equity funds pulling their weight?
Young says there are pros and cons. “Investing in green equity funds is a way of directing funds into areas that will explicitly address climate change and other sustainability related initiatives. Directing our existing wealth resources in this way should be one of the most efficient and effective ways to combat climate change and other externalities.”
However, she says “the scope for greenwashing, or even investor passivity, is high with these products” .
She explains that people are often willing to pay a “conscience premium” for items so we can “point to doing our bit for a particular cause”. The key lies in “assessing and being capable of holding your fund manager to account for how green your fund actually is” because “this could be a major con of these products”.
“Determining what sort of premium you should pay for this is not straightforward. You are one step removed from the actual climate protection action, and where to invest to get maximum returns for our planet is a complex question. Investor risk preference alignment is also difficult.”