The Art in Fossil-Free Index Funds

    Stockholm (NordSIP) – Last week, Storebrand Asset Management announced the launch of a new fund in its “Plus” series of index tracking equity products, which are designed to be fossil-free. The new Europa Plus fund follows three existing funds launched in 2016: Global Plus, Sweden Plus and Emerging Markets Plus. We reached out to the team behind the strategy to understand what motivated this recent addition and what differentiates this fund from its peers.

    When it comes to making index-tracking products more sustainable in general, the challenge is to minimise the tracking error, or keep the performance of the index and the fund as close as possible. By definition, every time a constraint is added to the strategy, the deviation is wider. Storebrand’s new fund tracks the full MSCI Europe benchmark, as opposed to a decarbonised index. “By minimising risk towards the full, unscreened benchmark, the risk taken when becoming fossil free can be significantly reduced,” explains Lars Qvigstad Sørensen, portfolio manager at Storebrand Asset Management.

    “The Plus strategy consists of far more than not investing in fossil industries. We see a wish for divestment from fossil companies as only one of several steps towards investing in a climate-aware manner. Divestment is binary by nature and does not express a view on the 80% of companies that are not excluded. We, therefore, go several steps further, by investing more in high-ESG and low-CO2 companies than the benchmark. Also, divesting from the causes for climate change is only one side of the story. Directing investments towards the providers of solutions to the climate challenge is just as important, and we’ve done that by allocating 5 to 10% of the capital in the Plus funds to pure-play green solutions stocks such as NIBE, Vestas Wind and Scatec Solar. For this particular type of stocks we’ve lowered the market cap threshold to below the MSCI World cut off value since many of the interesting, green solutions companies are not part of that benchmark.”

    In the world of fossil-free index trackers, there may be a way to go further than mere exclusions or carbon-neutralisation. “Tracking a fixed, rules-based index methodology is in our view the wrong approach towards managing the risks and opportunities arising from a dynamic transition to a low-carbon world. Our goal is to create a low-tracking error, diversified, low-cost fund which is well-positioned to outperform if or when the steps necessary to fulfil the requirements of the Paris agreement are taken. We will continue to develop the strategy as we go along to achieve this,” Sørensen continues.

    While sustainability teams seem to be growing like mushrooms these days, firms with long-term experience in the field can showcase this longevity as a real differentiator. “While many asset managers have launched sustainability teams over the last few years motivated by increased asset flows to sustainable investments, our team was founded in 1995,” says Sørensen proudly. “The long experience of the team, and our close cooperation with them while developing the Plus strategy, has been essential for the quality of the result.”


    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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