Behind the scenes: How do we select funds?

Behind the scenes: How do we select funds?

Through Cooler Future you can invest in curated funds with thematic focus on addressing sustainability and climate change issues. But how do we select funds?

Hanna Värttö

Jan 26, 2022



min read

Through Cooler Future you can invest in curated funds with thematic focus on addressing sustainability and climate change issues, allowing you to invest in smart energy, clean water, circular economy, and more.

For a fund to be included in Cooler Future’s investment platform it has to pass through a rigorous selection process that looks into the robustness of the fund’s sustainability focused strategy and environmental impact.

We want to make sure to select the best funds - the funds that invest in a way that makes us sleep well at night. We do the research and data crunching to identify funds that offer a sustainable investment option while genuinely considering the environmental footprint as well as positive environmental impact of the companies they invest in.

What makes these funds so good?

We start by screening a long list of funds for their environmental, social and governance related practices to discard funds investing in companies with severe business misconduct or controversies. Controversies may be related to environmental topics such as toxic waste, social issues such as involvement in human rights violations or use of child labor, or governance related topics such as corruption.

These checks are done to, as much as possible, avoid companies involved in severe controversies. Cooler Future ensures fund managers have solid policies and approaches in place (to support their sustainable investment objective and) to avoid unnecessary ESG (Environmental, Social, and Governance) related risks and minimise involvement in controversial activities.  

Food for thought:

Let’s take an example of renewable energy themed funds which often include companies that generate a major share of their revenues from fossil based energy sources. Such companies may be considered as being “in transition” to cleaner energy sources and hence supporting the renewable energy theme. However, for Cooler Future, such a company does not qualify as a “renewable energy” company as a major share of the company’s revenues still comes from fossil fuels. So companies with good intentions, but clearly still carrying the weight of fossil fuels, do not make an ideal fit in our view.

It is obviously important to support companies that make the effort to for example create clean energy solutions, but even more so the companies that are making clean energy the core part of their business and supporting the energy sector’s transition at a wider scale. This is why Cooler Future prefers to bring forward funds that have less exposure to fossil fuels than other similar thematic funds. The same applies to other controversial topics such as weapons. We don’t want to see funds with companies involved in weapons or severe human rights violations, no matter how big “sustainable” is written in the funds’ name.

Are all “sustainable” - labeled funds sustainable?

Many banks and asset managers are known to be major financiers of fossil fuels. At the same time, these institutions may offer a variety of sustainable and green-labeled funds to retail and institutional investors. While going through the details of potential funds that could be added to Cooler Future’s platform, we also review the qualifications of the institutions managing the fund. For example, a fund with a nice sustainable investment strategy and green credentials but managed by one of the major fossil fuels financiers globally, would not be ideal. We want asset managers to make sustainable investing and impact considerations part of their company practices, not something only applied through individual fund strategies.

Discarding the options that would make us restless at night - worried about what kind of ESG risks and controversies the portfolio companies might be involved in - is an important initial step because we don’t want funds doing some good while also doing quite some harm.

How about the impact then?

As part of the fund screening and review process we collect data and measure almost 30 different environmental impact metrics. Some of the metrics track companies’ negative environmental footprint while other metrics focus on measuring positive environmental impact companies may have e.g. through renewable energy generation or avoidance of emissions. Funds are ranked based on impact metrics, meaning that the funds are selected considering both the negative environmental footprint as well as positive environmental impact associated with funds’ investments. In practice this means that of a number of otherwise very similar funds, we would choose the fund with the lowest environmental footprint and/or highest positive environmental impact.

Food for thought:

This is quite different from how most other investment platforms work. The usual approach is to offer any funds available. Funds may be rated in terms of their exposure to ESG risks or according to the funds holdings’ average perceived level of sustainability. But this still leaves many open questions in terms of funds’ impact.

While having a long list of options to choose from can be a nice thing in other areas of life, when choosing your preferred sustainable investment product, it might only make things more confusing and lead to selecting a wrong product, actually not aligned with one's preferences after all.

Related Read

As seen above, not all investment products or funds are equal in terms of sustainability. As an attempt to avoid greenwashing, the EU's Sustainable Finance Disclosure Regulation (SFDR) classifies investment funds into three categories according to their level of sustainability: Article 6, Article 8, and Article 9 funds. Funds classified as Article 9 compliant are funds that have sustainable investment or reduction of carbon emissions as their objective and are sometimes referred to as “dark green” or “impact” funds, whereas Article 6 and Article 8 have less strict requirements. Fund classifications can be helpful in identifying sustainable investment products. Yet the current level of adoption of disclosure regulation still leaves some room for varying interpretations, and can’t quite yet be taken as a guarantee of sustainability or impact. Read more here: Sustainable finance disclosure regulation: What it means for investors

What to expect when investing via the Cooler Future App?

Curated funds offered through the Cooler Future App have been checked to be among the top funds in their thematic area. These funds bring an attractive combination of investments into companies creating and enabling positive environmental impact with relatively low environmental footprints compared to other similar funds. When investing through the Cooler Future App investors get access to multiple impact metrics relevant to their invested amount as well as the companies invested through the fund - metrics which are usually not readily available and visible to retail investors via other investment platforms.

We like to share our insights and be transparent with our investors. We believe that seeing the ins and outs of investments’ and companies’ impact should be accessible to everyone. This is why we include, track and share this information with investors through our app. Well aware that there are many kinds of investors (and many types of impact that investors might be interested in), we constantly develop the way metrics are shown as well as add new metrics based on feedback we receive from our users and as more and better quality data becomes available.

Investing in a company or a fund should be a decision made after considering both positive and negative impact associated with the investment. We hope that making this information available will make our users’ lives a tiny bit easier.

Why is this important?

There are hundreds if not thousands of funds claiming to be sustainable available in the market currently. But after doing the necessary ESG and controversy checks and impact reviews it becomes clear that most of these funds are not so sustainable after all (at least according to Cooler Future’s stringent criteria). And if this wasn’t enough, many of the qualifying funds are not readily available for regular small private investors.

For a private individual wanting to start investing in liquid listed assets the selection of sustainable funds becomes limited by not only the strict sustainability requirements, but also by other basic constraints associated with retail investing. Not all funds are available in all countries or accessible to retail investors. This means that there could be an interesting thematic sustainable fund out there, but it is not sold in your country or it's only available to professional investors.

Funds may also apply a minimum amount that has to be invested to get started. So instead of offering the possibility to start investing with small amounts such as €20, which Cooler Future enables you to do, some funds may require minimum investments of €1000 to €10000 or more. Funds that are clearly not targeted to retail investors may even have much higher minimum investment requirements which make them attractive to large investors, yet not available to the wider public.

Most retail investors prefer to invest in liquid assets which means that they can buy or sell them relatively quickly. This usually means investing in publicly listed and traded companies directly or through ETFs or mutual funds, which often excludes any investment products investing in alternative or private assets. Investing in alternative or private assets can be seen as an opportunity to generate more positive impact - yes. Yet these are also much more illiquid assets meaning that buying or selling will be more limited.

Given these constraints, (perhaps not surprisingly) many of the truly impact focused funds are only available to large investors. From thousands of funds there may be as little as some tens of sustainable funds available in a specific country suitable for private retail investors.

At Cooler Future, we are committed to do our fair share of research to find and bring forward investment products that we believe are doing the right things. The more money is allocated to sustainable assets and companies aiming for positive impact, the less money will fall into the ones not committed and driven enough to change the world.