Rise and rise of ethical funds as investors want green credentials
NEXT WEEK marks the launch 36 years ago of the first ‘ethical’ fund. It was cautiously received in some quarters and derided in others. Yet few then could have realised just how mainstream and popular the theme could become.
The Stewardship fund was created by Friends Provident, which took its first name from the Quaker term for the Society of Friends. It drew on Methodist and Quaker personal values for devising the collective in 1984.
Some brokers dubbed it the Brazil fund, not through concern for diminishing rainforests but because you had to be nuts to invest in it.
Initially, ethical saving meant omitting so-called ‘sin’ stocks like oil, tobacco and arms from your portfolio.
It has evolved into ‘social responsible’ investing (or SRI) as it now embraces social and environmental factors when analysing securities.
Screening is employed in two ways: positively to favour companies with strong ethical and environmental actions and negatively to avoid those operating in such fields as alcohol, mining and tobacco.
There will naturally be divergent views and often contradictions between those who wish to maximise income and growth and may have a duty to do so, such as a pension fund manager trying to secure good returns for retirees.
Over a quarter of money managed around the globe is now invested with SRI factors in mind, reveals Emma Wall, head of investment analysis at broker Hargreaves Lansdown. This includes the national pension funds for Japan and The Netherlands.
SRI has become distinctly political. At the last General Election, Labour said it would delist from the main stock market those companies which failed to achieve environmental targets.
Insurance funds, local authorities, company pension schemes and charities looked at their portfolios after the 2008 financial crisis and many of their appointed managers were asked if they were acting strongly enough as shareholders.
A higher bar for strong governance has also been accompanied by rising concerns about climate change.
If using a wealth manager or financial adviser, expect enquiries about SRI now as a fundamental part of the investment approach. Increasingly, competitive returns are required but with companies chosen to make a positive contribution to society and the environment. This ‘Attenborough’ and ‘Thunberg’ effect is particularly popular with younger investors.
A good list to check is the
FTSE4Good UK 50 index but the inclusion of Shell has raised an eyebrow. Some investors argue that the company boosts its ‘green’ credentials through a renewable energy division which is part of plans to become a netzero emissions energy firm by 2050.
There is no single, common definition of which firms are ‘ethical’ or ‘responsible’ and so every fund has its own approach. Companies have become adept at painting a flattering picture of themselves but fund managers need to conduct primary research and engage with firms which involves actively voting and reporting on them.
“Investors need to look under the bonnet of each proposition marked ethical to ensure it marries up to their ethical stance before committing their cash,” warns Myron Jobson from discount broker Interactive Investor.
“2019 was really the year that responsible investing became mainstream. The momentum had been building, thanks to social media and the instant ‘shaming’ of companies that were treating customers, staff or the environment badly,” says Darius McDermott, of Chelsea Financial Services.
He says many fund management companies now have an element of ESG (environmental, social and governance) in their processes with some more robust than others. He tips ASI UK Ethical, up 118.8 per cent in a decade. The fund regularly surveys clients to find their views on SRI and uses this information to adjust the portfolio.
McDermott also likes BMO Responsible Global Equity which both avoids unsustainable business practices and those involved in alcohol, gambling, pornography, tobacco and weapons. It is fossil fuel free and has jumped 179 per cent in 10 years.
James Rowbury, from Redmayne Bentley, says investors are asking which major oil firms are adapting to international climate goals while also battling an industry in structural decline. “The greatest challenge for investors is looking beyond those companies that are simply greenwashing their activities and instead focusing on those building a sustainable, wellgoverned infrastructure,” notes Rowbury.
He feels emerging markets present a great opportunity owing to the underdeveloped nature of business practices and the strong correlation between SRI and stronger financial performance. His tip is the Alquity Future World Fund which launched in 2014.
Schroder launched its ISF Global Energy Transition fund last year. It invests mainly in clean energy generation, renewable energy equipment, energy storage and transmission. It is supporting Hornsea One, an offshore wind farm with 190m tall turbines.
Often investing ethically may expose savers to higher levels of risk and volatility, warns Martin Payne from wealth manager Brewin Dolphin in Leeds. He tips Syncona, a leading healthcare provider which evolved from the Battle Against Cancer Investment Trust. It aims to have a stake in up to 20 companies.
Jupiter Ecology is also recommended by Payne. It was the first authorised green unit trust and concentrates on smaller and medium-sized companies.
He also likes John Laing Environmental Assets which invests in global projects utilising natural or waste resources or support more environmentally friendly approaches to economic activity, such as generating renewable energy.
Baltimore-based Brown Advisory has created its US Sustainable Equity fund of 30-40 larger, quality growth shares. It is fossil fuel-free with no exposure to weapons and excludes animal testing for non-medical purposes.
It is tipped by Jason Hollands of Tilney Investment Management who also likes EdenTree Amity European. The latter will not invest in companies where over 10 per cent turnover is in alcohol, gambling and intensive farming or operates in countries with oppressive regimes.
Wall selects Kames Ethical Equity, which has been managed by Audrey Ryan for two decades, who excludes two-thirds of the UK’s largest companies on ethical grounds. It is up 112.6 per cent in 10 years.
Her other tip is First State Asia Focus. Its manager, Martin Lau, and his team see themselves as part-owners of each business they buy.
It focuses on long-term, sustainable growth and avoids firms which take advantage of tax loopholes or which skirt around industry legislation. It has grown 81.6 per cent in five years.
With major firms cutting or suspending their dividends as a result of Covid-19 effects, investment trusts are particularly suitable as they can withhold profits for lean years and by their closed-ended structure are not forced to sell assets.
If wishing to invest away from equities, the Rathbone Ethical Bond fund is “a great alternative”, says McDermott.
It buys the investment grade bonds of reliable companies with solid business plans and stable management teams. It has a higher income target than most of its peers while still taking an average level of risk.
Ethical exclusions are simple with no mining, arms, gambling, animal testing, nuclear power and the like but requiring one positive environmental, social or corporate governance quality. It has risen 89 per cent in a decade.