Saving DOESN’T have to COST the earth

How investing in green and ethical funds could now be well worth your while

FIGHTING climate change can now be financially rewarding. For while coronavirus has ravaged investors’ portfolios, many green funds have avoided the worst of the pain.

You can pick ethical funds for your stocks‑and‑shares Isa that focus on compa‑ nies with strong environmental credentials and typically exclude those with bad ones, such as fossil fuel companies.

In the month to March 12, Liontrust UK Ethical Fund, which excludes all fossil fuel companies, was down 4.3 pc — while the FTSE All‑Share Index fell 21.6pc in the same time.

The reason is that oil and gas stocks have suffered particularly badly during recent falls. In the weeks since oil prices started to fall on March 6, oil and gas stocks in the FTSE All‑ Share index were down 34pc. The index as a whole was down 21 pc.

This was due to Saudi Arabia’s slashing of oil prices as part of a price war with Russia, which reduced the revenue available to companies in the sector.

THE HEALTHIEST GREEN FUNDS

THE two best‑performing green funds tracked by investment research firm Morningstar have produced excellent returns in the past five years.

Lyxor New Energy UCITS ETF has gained 92pc, turning £10,000 into £19,200. The fund tracks the index of the world’s largest alternative energy companies working mainly in solar, wind and biomass.

Impax Environmental Markets has gained 61pc over the period — turning £10,000 into £16,100. Its largest holdings are sustainable forestry company Rayonier and EDP Renovaveis, a wind power company.

For a UK‑focused fund, Liontrust UK Ethical Fund has gained 52.8pc over the past five years, compared with its benchmark of UK stocks, MSCI UK, which gained 17.8pc. Its largest holdings are the London Stock Exchange, insurer Legal & General and King‑ span, a building materials company.

‘Green funds should hold up better if low oil prices continue — as Russia and Saudi Arabia signal they could,’ says Adam Laird of Ards Ventures, an an asset management consultancy.

BEWARE OF POLLUTION

Investors should be aware their Isas are likely to contain a big chunk of polluting compa‑ nies, unless they choose funds that specifically exclude such firms.

More than 10 pc of the FTSE 100 Index is made up of oil and gas companies, while a further 7pc is made up of mining companies, which are often criticised for their environ‑ mental policies.

A recent survey by Triodos, an ethical and sustainable bank, found 61 pc of Brits say that money in savings and investments needs to be moved away from fossil fuels, but 65 per cent had no idea if their money was currently supporting polluters.

While Lyxor New Energy and Impax Environmental Markets are pure green funds, the majority of funds that let you channel money towards battling climate change are environmental, social and governance (ESG) funds.

This means they also select companies with good social standards and good governance standards (such as around execu‑ tive pay), while avoiding those with poor working conditions in their supply chain.

RISING GREEN MONEY-MAKERS

MANY ethical investors have fared better recently. ‘As a group, ESG funds have outperformed other funds over the past two years,’ says Hortense Bioy, director of sustainability research at Morningstar. over longer time scales, such as five years, comparisons are harder to make, partly because many funds have ‘ESG‑ proofed’ their strategies in recent years, and so changed from one category into another. But James McManus, of online investment service Nutmeg, says that investors in ESG funds can expect an equivalent return. Bioy says that, on the whole in this sector, passive funds (those that track an index) have done better than active funds, where a human manager selects the best stocks, because of lower fees. McManus recommends two passive funds. UBS MSCI ACWI Socially Responsible (Hedged to GBP) UCITS ETF is a global equity fund whose top holdings are

Microsoft, Procter & Gamble and Home Depot.

For a bond fund, he points to UBS Bloomberg Barclays MSCI U.S. Liquid Corporates Sustainable UCITS ETF, a U.S. corporate bond fund whose top holdings are Bristol Myers Squibb, CVS Health and Morgan Stanley.

Companies that score well on ESG measures are more likely to be growth companies — those in sectors such as technology, sustainable energy or biotech‑ nology, which have the potential for large price gains or losses.

In recent years, growth stocks have outperformed other stocks by a large margin, led by the huge gains in the large tech companies such as Amazon, Apple and Google.

However, because they avoid certain sectors, green funds can reduce your diversification.

In the FTSE 100, 17 pc of the index is comprised of either oil and gas or mining stocks — which may be excluded by green funds — so a climate change fund focusing on the FTSE 100 would leave your allocation heavily biased to financial and pharmaceutical companies.

ARE THEY REALLY ALL ETHICAL?

IT’S important always to check what your fund contains: many ESG funds include oil and gas firms, for example, because they have large investments in alternative energy. L&G Future World ESG UK Index currently has more than 10 pc in two oil and gas companies and a tobacco company. The largest holding in Royal London UK FTSE4Good Tracker Trust, with more than 9 pc, is Royal Dutch Shell.

In most cases, Morningstar includes a measure of ESG for funds on its website.