How Cooler Future reviews and selects funds

How Cooler Future reviews and selects funds

The funds offered on our platform are selected on merits — but what does the process look like? Here’s how we narrow down from more than 2,000 choices.

Hanna Värttö

Oct 13, 2021

·

10

min read

Choosing from a seemingly unlimited number of investment products can become an overwhelming task to get a hold of. Indeed, how does one actually get through the noise and identify sustainable investment products that are truly making an effort to contribute to some of the most pressing environmental issues we’re currently facing around the world?

Understanding whether a fund is actually as “green” or sustainable as it claims calls for analysing its holdings and investment strategy in some serious detail. Seeing beyond the green labels takes a lot of time, research, and effort.

Cooler Future’s investment platform offers a curation of investment funds that have sustainability as their objective. This means that the funds’ investment strategies address critical environmental challenges, including climate change, access to water, pollution, biodiversity loss, and exhaustion of natural resources, among others.

Currently, our users can invest in a Smart Energy fund (with a Clean Water fund coming up next). Keep on reading to see how Cooler Future reviews and selects funds for our platform.

The Speed Read:

1. The initial universe is compiled from a list of 2,000+ sustainability and impact funds.

2. These funds are ranked against their thematic peers based on ESG, impact, and financial performance. It’s important to note that ESG and impact metrics are taken into account first, in line with Cooler Future’s impact-first methodology.

3. Top-performing funds are shortlisted for final review, and the highest-ranking funds, within their strategic focus, are eligible to be included on the platform.

The initial universe: 2,000+ funds

The starting universe of funds consists of open-ended sustainability and impact funds.

First, the funds are categorised according to their main investment theme. To exemplify, these include:

Every theme, of course, would have a different number of funds. For example, the energy- and renewable energy-focused funds are selected from a list of approximately 200 funds, while the initial screening of the funds that focus on water-specific thematic investing consists of approximately 60 funds. Thematic categories are used at a later stage to compare funds against their peers when we are to determine the creme-de-la-creme in each thematic category.

Funds could be categorised as Article 9 (impact funds) or Article 8 (sustainable funds) according to the EU’s Sustainable Finance Disclosure Regulation – but official categorisation is not a requirement for a fund to be eligible.

ESG screening for controversies, ratings, and more

ESG controversies

Next, funds are screened for ESG (Environmental, Social and Governmental) controversies on a holding/company level.

The ESG screening is used to identify the highest-ranking funds currently available in the market. The same criteria is applied to all investment themes to maintain comparability across all funds. It’s also worth noting that Cooler Future does not have control over the security selection or portfolio construction of the funds offered by other financial institutions. Therefore, some of funds’ holdings may include individual companies that are not fully compliant with all of Cooler Future’s own ESG screening criteria.

Typically, there can be anywhere from 40 to 150 holdings in each fund. Each holding is screened for their involvement in activity- and conduct-related ESG controversies.

Cooler Future’s ESG screening is used to identify the portion of holdings in each fund that is in compliance (or non-compliance) with any of Cooler Future’s selected ESG screening criteria.

For each fund, a percentage of companies (determined by the company’s weight in the fund) compliant with Cooler Future’s ESG screening criteria is calculated for severe and non-severe controversies.

(Please note that the ESG screening criteria here all refer to negative ESG screening and exclusion criteria, i.e. a list of things that we do not want. So when we say “ESG screening criteria”, we mean that we use these criteria for negative screening and exclusion.)

To be eligible for the Cooler Future platform, at least 90% of holdings in the funds (also measured in the company’s weight in the fund) need to fully comply with severe ESG criteria. In the case of non-severe ESG controversies, at least 70% of all companies in the fund need to fully comply with non-severe ESG criteria. (Typically, 90-95% of companies in the best-ranking funds comply with severe ESG criteria, and 80-95% of companies with non-severe ESG criteria.)

This minimum criteria is used to help us narrow down the list of funds and investment products offered on the platform.

Still, it’s only a minimum criterion, which ensures that we would not select funds that are worse than that, meaning they, literally, do not pass even the bare minimum required. (Of course, the funds ultimately selected, e.g. the Smart Energy fund from RobecoSAM, fulfill the criteria to a much higher extent than just the minimum criteria.)

To apply a 100% compliance with Cooler Future’s strict ESG screening criteria across all investment themes is currently not a viable expectation from publicly-traded mutual funds — simply because then we’d have exactly zero funds to choose from.

Disclaimer

The way ESG screening criteria works for activity-based exclusions is that you either have zero tolerance (so companies cannot have any industry ties whatsoever to the excluded activity) or that a maximum revenue threshold is set for such activity. For example, at Cooler Future, we’ve set a 5% revenue threshold for fossil fuel production because we recognize that some companies, while already demonstrating solid evidence of transitioning from black energy to green, are still in the process of doing so. To compare, some other financial institutions may have set significantly higher thresholds for their funds concerning such activities (e.g. between 10-50%).

ESG rankings

For a final ESG screening, we also rely on external ESG ratings from notable data providers and rating agencies, such as CDP and MSCI.

Generally, in our selection, funds should have an ESG rating of AAA or AA (MSCI) and a Climetrics rating (CDP) of 3 or higher (scale of 1-5, where 5 is the best). Funds that do not fulfill these ESG-rating minimum criteria are not initially eligible for the Cooler Future platform.

Impact screening

After the ESG screens, the funds are screened for impact metrics. When it comes to this part, it’s crucial to remember that “not all funds are created equal” — it doesn’t make sense to compare all funds according to the same exact metric.

There are therefore core impact metrics (i.e. those that can be calculated for more or less all funds), additional impact metrics (i.e. those that depend on the fund’s theme), and supportive impact metrics.

Some of the core impact metrics are the following:

The core metrics are consistent across all funds, mostly focusing on environmental and climate matters. While footprint metrics, for example, provide a snapshot of the environmental impact that the companies in the fund have through their operations, we also consider the so-called "handprint" metrics: the wider positive impact that the very companies in the fund may create through their own products, services, and solutions.

It’s important to understand that impact means a different thing depending on the area of impact. For example, if we’re dealing with a water-focused fund, we’d put more emphasis on a water-related impact metric rather than a decarbonisation metric, because a water fund’s objective normally wouldn’t be to reduce carbon emissions but rather to increase access to clean water or provide solutions that help save water, for example. So some metrics can vary depending on the thematic focus and investment objective of the fund.

For this very reason, we also calculate additional impact metrics based on the fund’s theme. These additional metrics are usually more complex.

Additional impact metrics, such as avoided emissions, renewable energy generated, water saved or recycled, are calculated for funds where such metrics are relevant given the fund’s thematic focus.

Then, there are also supporting impact metrics. Supporting metrics are the kind of metrics that we do not use as part of the screening process per se, but we may look up depending on the specific factors faced during the Detailed Fund Review stage.

Financial screening

Although historical returns are, of course, no guarantee of future performance, we still examine the asset manager's historical performance, current strategy, and portfolio allocation to build a holistic understanding of the strategy and the asset manager's ability to carry out that strategy. Here, the criteria reviewed include the risk & return, volatility, diversification across sectors and geographies, specific risk concentrations, fee structure, and Sortino Ratio, a measure of risk-adjusted return.

Peer comparison and shortlisting

Peer comparison is done within each investment theme by using the above-mentioned ESG, impact, and financial screening metrics as criteria to rank the funds in order of performance.

Any shortlisted funds need to fulfill the ESG minimum criteria (as also mentioned above). In general, the preference is always given to funds with minimum exposure to severe ESG controversies.

When it comes to impact metrics, the general preference is to select funds with lower-than-peer footprints and/or higher-than-peer handprints.

In terms of financial metrics, funds with higher risk-adjusted return, lower portfolio risk concentrations, lower portfolio turnover, and consistency of the funds' stated strategy vs. observed strategy (attribution) are ranked favourably.

As a result of peer comparison across ESG, impact, and financial metrics, the number of potential funds is usually narrowed down to 5-7 highest-ranking funds per theme, selected from tens or several hundreds of funds per theme and an overall universe of 2,000+ sustainability and impact funds.

The most attractive funds according to peer comparison are shortlisted for a detailed fund review:

Detailed fund review

At this later stage, funds are reviewed in more detail for their strategy, holdings-specific performance, sustainability- and climate-related disclosure.

Asset managers’ sustainability and climate change-related track records and ambition are reviewed based on asset managers’ disclosure, commitment and engagement efforts, and involvement in the climate investment space. In practical terms, this means that we see to what extent asset managers are actually involved in climate issues. For example, we see if asset managers are signatories or form part of CDP, Task Force on Climate-related Financial Disclosures (TCFD), Climate Action 100+, Net Zero Asset Managers Initiative, among other things. We do this because we believe that commitments need to be backed up.

The preference is to select funds from asset managers with active ownership (also known as stewardship) and engagement practices, transparent (!) climate and impact reporting, as well as a good track record and reputation in sustainable investing (meaning that, if the fund itself is deemed good, we still wouldn’t select it if the said fund’s asset manager has misaligned values and actions).

Following the detailed fund review, typically a shortlist of 3 funds per theme remains.

Fund selection

Final fund selection is based on ESG, impact, and financial criteria as well as the overall strategic fit of the fund’s asset manager. Funds selected for the Cooler Future platform are generally expected to excel in their thematic investment approach.

Selected funds’ key metrics can be found in the funds section.

Conclusion

This is not where the story ends.

When investment products are added to Cooler Future, they become part of a continuous review process where their ongoing performance is tracked against the initial selection criteria. Any significant deviation from the initial ESG, impact or financial criteria could lead to a fund’s exclusion from our platform if we notice that the fund and fund holdings no longer align with the requirements.

Impact- and ESG-related performance is constantly reassessed by closely following the fund’s strategy and updates in its portfolio (generally on a monthly and quarterly basis).

By offering a curated list of funds, our goal at Cooler Future is to help investors to choose from the best-in-class funds that truly have sustainability as their objective. Integrating climate metrics, alongside the financial returns, is what is true to our core - and, ultimately, makes Cooler Future different.

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