Today there is a clear financial message: you can be green and still gain good returns. From once being seen as a niche position, ethical and environmentally-friendly investors are now significant in number and have a wide choice of funds available.
From issues as diverse as child labour and plastic waste, a growing number of savers are attracted to the concept of achieving reasonable financial returns while at the same time supporting a social and/or environmental approach.
Recent television programmes, such as David Attenborough’s Blue Planet II and the BBC documentary War on Plastics, have highlighted a giant global problem while climate change is evident to most, if not President Trump.
Investing ethically has actually had a long history with 19th century leadership by the Methodists and Quakers who sought to exclude ‘sin’ stocks such as alcohol and tobacco.
The first ethical fund was launched 35 years ago by Friends Provident. Today there are over 80 green and ethical investment and pension collectives with the sector becoming notably popular with younger investors.
Yet only 1.2 per cent out of £1.8 trillion assets invested in the UK is in environmental, social and governance, known as ESG, according to the Association of British Insurers. Currently solvency rules restrict insurers from investing in longer term projects, notably wind farms and solar power.
The association recognises that savers expect funding to be used to handle the impact of climate change and have lobbied the pachyderm-like Prudential Regulation Authority to interpret the rules differently as reliable returns may take up to three decades to reach fruition.
Those who expect a quick response will be disappointed. The PRA is being catatonic and will not review the rules until next year.
Traditional ethical funds use negative screening to avoid companies engaged in such activities as gambling, tobacco or manufacturing weapons.
There is a perception that performance has to be sacrificed for principles but Rob McQuire, independent financial advisor at Chase de Vere in Leeds, says, “This is not necessarily the case. Ethical funds usually out-perform when the sectors they don’t hold perform badly.”
Yet ethical portfolios tend to be skewed towards mid and small cap companies, which can mean more volatility than usual.
A new breed of ESG funds has appeared which, instead of taking a negative stance, are seeking a positive contribution to the environment or to society or have strong governance relating to diversity and equality. McQuire recognises that the criteria is subjective which means potential investors need to understand what approach their intended funds are to take.
Many investors remain concerned they will miss out on profitable opportunities if they limit their scope to this sector. However, “there’s no evidence that a broad-based socially responsible portfolio will perform worse than a traditional group of stocks,” declares Ian Forrest of The Share Centre, adding that many funds deliberately give themselves a wide mandate and not just take a dystopian approach.
“European funds marketed as sustainable are more likely to be top performers,” says Saul Fulda, Investment Analyst at Redmayne Bentley. He has identified two funds which have delivered around 17 per cent in the past year: Axa Global Factors Sustainable Equity manages its carbon footprint and excludes tobacco exposure whilst Liontrust Sustainable Future Global Growth invests in electric vehicles, healthy food and smart farming.
Forrest likes the Liontrust Sustainable Future Managed Fund as it is multi-asset and less concentrated.
McQuire tips three funds. Kames Ethical Equity has been running almost 30 years with just two managers. It is ‘dark green’, meaning it has no exposure to large oil companies, no international banks with exposure to third world debt, no pharmaceuticals, no supermarkets and no firms who politically donate over £25,000.
He also likes Rathbone Equity Bond which trades in good quality corporate bonds, yielding 3.7 per cent. It is widely diversified including a UK charity for disabled people and their families, a not-for-profit firm that supports social housing and mentoring ex-offenders. McQuire and Forrest also tip BMO Responsible UK Equity, formerly called Stewardship, with an advisory panel headed by the Archbishop of Canterbury.
Despite the number of collectives available, “demand is still relatively low,” says Darius McDermott of Chelsea Financial Services, adding that ethical funds are increasingly using the UN’s sustainable development goals as a framework for their investments.
His firm likes ASI UK Ethical Equity, Pictet Global Environmental Opportunities and both the BMO and Rathbone funds mentioned above.
Brewin Dolphin’s senior investment manager, Martin Payne, likes Syncona, which evolved from the Battle Against Cancer investment trust. It invests in leaders in life sciences, notably human genome sequencing, gene therapy and immunotherapy.
Over five years, it has returned 110.9 per cent.
Payne also picks Impax Environmental Markets which sees long-term capital growth in 60-80 stocks in the energy, water and waste fields. Currently it favours small and mid size in North America (43 per cent) and Europe (35 per cent) and is up 71 per cent in five years.
John Laing Environmental Assets is another choice, rising over 55 per cent in five years. It seeks natural or waste resources or environmentally-friendly projects with at least half its portfolio by value is located in the UK and targets.
Royal London Sustainable Leaders is one of Dzmitry Lipski’s choices at Interactive Investor. He says the fund aims to beat the FTSE All-Share Index by investing in at least 80 per cent of UK shares that have been identified as making a positive contribution to society, such as Rentokil Initial whose products protect people from pest-borne disease. An exchange traded fund – UBS MSCI World Socially Responsible – is his other selection for a low cost (0.25 per cent) way to access ethically across the globe.
Adrian Lowcock, chartered wealth manager at adviser Willis Owen, likes SLI UK Ethical where companies and industries are screened in and out. The latter includes environmental damage, animal testing and genetic engineering whilst positives involve community involvement and charity donations.
The positive impact a company makes is considered by Hermes Impact Opportunity, says Camilla Ritchie at Seven Investment Management, such as Orsted which is transforming from a high to a low carbon world, moving out of fossil fuels into renewable energy.
Ritchie also suggests the Threadneedle Social Impact Bond which supports such initiatives as housing in deprived areas.
Another way to gain or use an asset in this sector is through a building society, notably the Ecology, based in Silsden near Keighley.
It was founded in 1981 to help finance environmental building renovations and support sustainable development. It now has £178m assets, almost 10,000 members and a net annual £1.022m profit.