Is your money doing good?
Fergus Moffatt, head of public policy at UKSIF, says: “Good Money Week is our annual national campaign to raise awareness of sustainable, responsible and ethical finance. Many people don’t realise they can make good money choices every day in the way they bank, save into their pension or invest their money. Sustainable and ethical investment allows you to create a positive impact on the environment and society without sacrificing financial performance.”
Ethical funds are becoming more popular. Research from the Investment Management Association shows that assets held in ethical funds have more than trebled in the last 10 years to £16.7 billion. However, they still represent only a small portion (1.3%) of overall funds.
Increasingly, fund management groups are incorporating an ethical screen across all their funds. This is both push and pull: regulation is increasing the number of fines for companies that do not behave ethically, at the same time as major investors, such as pension funds, are demanding ESG (ethical, social, governance) screens as part of basic risk management.
While, the average UK ethical fund has outperformed the FTSE All Share over 10 years, it is slightly behind the average non-ethical fund. However, research suggests that over time, incorporating certain ethical criteria can improve performance. Analysis by the Boston Consulting Group released showed that those companies who score highly on ESG criteria are more profitable and command a higher market valuation than their peers. The analysis, which looked at more than 300 of the world’s largest companies showed earnings were 3.4% higher for these groups, and in some industries – such as the pharmaceutical industry – the difference was particularly marked.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Ethical investing is still a small part of the fund landscape, but there are signs it’s finally gaining traction with UK investors. Ethical fund sales are ticking up, albeit from a relatively low base, and traditional funds are also becoming more socially responsible. That’s partly because a poor ESG record is now widely seen as a red flag for investors from a risk perspective, as well as an ethical one…Investors still need to be scrupulous in their fund selection however, both in terms of picking a manager with pedigree, and making sure their chosen fund meets their own ethical requirements.”
Khalaf said that in choosing an ethical fund, investors need to consider both the pedigree of the fund manager running their money and the ethical criteria used. The composition of the FTSE 4 Good UK Index demonstrates this can be a highly subjective area; constituents like Royal Dutch Shell, BHP Billiton and Paddy Power Betfair may not meet everyone’s definition of an ethical company. Investors therefore need to check each fund’s policy carefully to ensure it meets their ethical objectives.
Hargreaves Lansdown top picks on ethical funds
Kames Ethical Equity
We think the manager of Kames Ethical Equity, Audrey Ryan is one of the best. She’s a passionate ethical investor who uses a strict approach, excluding certain areas completely. Tobacco and alcohol producers, munitions manufacturers, and companies that use animal testing won’t find a place in this particular portfolio.
The fund’s done exceptionally well since Audrey Ryan took control in January 1999. It’s grown 282.2% compared with 196.3% for the broader UK stock market, helped by exposure to medium and smaller companies.
The fund can’t invest in 69% of the UK’s largest companies because they operate in areas like oil & gas, tobacco and munitions, which leads the manager further down the cap scale. This is a higher risk approach but one which comes with higher rewards for successful active investors.
Stewart Investors Asia Pacific Leaders
David Gait and the team behind this fund use a less restrictive approach, which means technically they could invest in any sector, though they only invest in businesses which make a positive contribution to society in the countries where they’re based, engaging closely with company management to maintain or improve corporate behaviour where needed.
This fund invests in companies based across Asia – from India to Taiwan and Singapore to the Philippines. So it combines exposure to some of the fastest-growing regions of the world with a focus on companies that put environmental, social and governance issues at the heart of what they do. The team have built an exceptional track record and take a conservative approach in a dynamic, but risky area of the investment world.