Three green stocks that escaped the ethical bubble

“Ethical investing” has soared in popularity in the past year, lifting the share prices of companies that fall into the capitalism-with-a- conscience bucket. Many such stocks now look expensive, but savers can still find bargains among businesses that are making the world a better place.

Investors have poured £11.6bn into funds that invest according to environmental, social and governance principles in the past 12 months, according to Calastone, a fund administrator.

Russ Mould of AJ Bell, the fund shop, said: “Ethical stocks have been bid up as investors choose to use their money for good as well as for returns.”

The FTSE All- Share index, a broad measure of the London stock market, has a price-to-earnings ratio, a measure of valuation, of 22. The higher the p/e, the more expensive the stock. However, the 100 most ethical stocks, as identified by the data firm Morningstar, trade at an average p/e ratio of 61. This rise in valuations means that investors risk getting lower returns in future.

Despite such lofty average valuations, ethical investors do not need to pay a high price for returns as some of these companies remain cheap. Morningstar found that 15 of the 100 most ethical stocks had a p/e ratio below the market average.

Andrew Jones of Janus Henderson, the fund manager, said Kingfisher, owner of the B&Q DIY chain, was a strong ethical stock that traded at a p/e of 12.8, making it one of the cheapest around.

He said: “It has a long- standing responsible business strategy focusing on diversity, lowering carbon emissions, improving the sustainability of its products and good governance.”

The firm has also benefited from the increased popularity of DIY over the past year and a new management team has exceeded expectations. “Kingfisher has not made the most of its market position over the years but we feel the new management team will improve returns,” Mr Jones added.

Peter Silver of Aberdeen Standard Investments said the housebuilder Barratt Developments was another strong but cheap ethical stock. The firm has a lot of cash and little debt, just as the housing market has gone into overdrive.

Its ethical practices were exciting, he said. “Barratt has ESG credentials well ahead of its rivals. It has a Home Builders Federation five-star rating, a proactive attitude to customer care, declining accident numbers and carbon emission reduction targets, including a net zero target for 2030 for its new homes,” he added.

The firm’s p/e of 19.5 made it one of the more expensive on the list, but still cheap relative to other firms.

For example, engineering company Renishaw, safety technology firm Halma and media company Future all score well on ESG metrics but trade on p/e ratios that range from 101 to 52.

Richard Curling of Jupiter, the asset manager, said Primary Health Properties, a real estate investment trust, was worth considering. It owns GPs’ surgeries and healthcare buildings within residential communities that give local people better access to healthcare. Its properties meet the latest environmental standards with near- zeroenergy buildings.

“I like this investment not only for its strong environmental and social attributes but also for its stable and reliable returns,” Mr Curling said. He added: “The properties are let to GPs, who have their rent paid by the Government, on long leases with inflationlinked or upward-only rent reviews.”

The trust has increased its dividend every year for the past 25 years, yet currently has a p/e of just 17.

Shares in B&Q owner Kingfisher, which has a strong ethical score, look cheap