There was a time when it could be argued that Ethical funds were unethical in that they never seemed to subscribe to the ethical priorities of individuals who invested in them. Someone could be concerned about investing in electronic companies that made components for weapons systems but were happy to invest in cigarette companies whilst others held directly opposing views so the only way to avoid investing in companies you disapproved of was to buy individual company shares whose practices you had researched personally. The other issue was their performance which seemed to imply that there was a cost to choosing to avoid companies whose products or services you preferred not to benefit from.
Happily, all that has changed with funds specialising in companies with socially responsible and sustainable now being amongst the best performing when compared to many mainstream funds.
According to research, close to two-thirds of sustainable funds beat the average performer in their category, as classified by data provider Morningstar, which groups products by the kind of assets they invest in such as bonds or equities. Morningstar examined the net return of funds domiciled in Europe. More than 34 per cent of sustainable funds appeared in the top quartile of their category in the year to June and about 63 per cent made it into the top half.
However, people often assume that investing in sustainable investment funds is more about principles rather than profit.
Senior investor relations manager at Triodos, Adam Robbins said, “Very often people assume you have to give up decent returns to do good with your money,” he says. “But this isn’t philanthropy, it’s about people, planet and profit. The research bears that out, showing that sustainable funds are often generating better returns than more traditional funds.”
In the past, investors wanting to invest with an ethical, environmental, or socially responsible approach had to put up with a relatively limited choice of funds. This made it difficult to build a diversified portfolio across markets and asset classes. Thankfully, in recent years there has been a wealth of new funds launched which is providing greater choice for the investor.
However, the jargon used to describe the concept of investing using ethical and sustainability funds continues to grow, thus creating more confusion around the topic. Here are some of the main ways you can consider aligning your principles with your investments.
Stewardship: Fund Managers like to feel they are part owners of the companies they invest in and want to ensure they are managed in a way that benefits shareholders. They are focused on stewardship and normally engage with company management to make sure their views are heard on issues that are important to investors. Some lobby company managers on the environment, social and governance issues. This could mean they could set targets to reduce waste and carbon emissions to ensuring companies treat their employees, suppliers, customers well.
Environmental, Social and Governance (ESG): Investing in a fund that considers ESG factors in its investment process is one of the least limiting ways of incorporating your values into investments. However, some managers will still avoid investing in certain industries, like mining, tobacco and weapons even though they technically could invest here.
When analysing a company, a manager will consider environmental, social and governance factors as part of their wider research. Their aim is to invest in companies with the best prospects, and they believe ESG factors play an integral part in the long-term performance of a company. Managers of ESG funds will work with companies to encourage changes where necessary.
Impact funds go a stage further and must measure and report back on the impact they set out to make on the environment and society. For instance, they may invest in companies that save a quantifiable amount of water, or avoid producing too much carbon dioxide. This means they can be more limited on where they can invest than sustainable funds, but each investment has a direct, measurable impact.
Exclusions-based funds: These funds are also known as ‘ethical’ or ‘negatively-screened’ funds. Fund Managers will not invest in companies, industries or countries that do not meet their moral criteria. These could include companies that damage the environment, e.g.: those involved in the mining, or oil and gas industries. Weapons manufacturers and tobacco companies can also be excluded but the exact restrictions will vary from fund to fund.
Sustainability: These funds try to make money by investing in companies that are more sustainable than their competitors, or are likely to benefit from the growing need for more sustainable goods and services. These funds focus on the needs of the present without compromising the ability of future generations to meet their needs.
Birchwood believe that it is time to look again at some of these funds, not just for ‘doing the right thing’, as they can also produce excellent returns because the principles that the managers apply in their stock selection (e.g. sustainability of their business model and the level of corporate governance) are key factors in a ‘well run’ business. We have, therefore, developed a well-diversified balanced portfolio of these funds as well introducing the Royal London Sustainable fund into our core Balanced portfolios.