Sustainable investment funds have exploded in popularity in the last few years, now holding more than $1 trillion of investors’ cash as the ‘Blue Planet effect’ made people rethink the impact of their choices on the planet.
These funds have also proven themselves against their rivals – over the last 15 years, ethical funds have returned 196% versus 148% from non-ethical funds
Fund management houses have been busy rolling out new products to meet demand for more mindful investing, and ISA investors have never had so much choice. So what are some of the main options available now?
Sustainable funds: the main approaches
Julia Dreblow is founder of SRI Services, which researches sustainable funds. She explains that fund providers take a few different approaches in selecting responsible investments. Some will avoid companies with poor practices or in objectionable industries (so-called ‘sin stocks’) – this approach is all about exclusion or ‘negative screening’ to remove the worst offenders. Usually passive funds with an ‘ESG’ (environmental, social, governance) badge will just do this. Others take a supportive stance, so they will hold only those companies doing positive things, these are often impact investing or themed funds, perhaps with an environmental or social focus. And then there are those that aim to influence change through ‘responsible ownership’. This means they talk a lot about engagement and stewardship – they will hold less-than-perfect companies and try to effect change using shareholder pressure.
The big issues
The type of issues on which funds focus will help you decide what should make it in to your ISA. Some might prioritise environmental issues such as climate change and pollution; social issues like human rights, labour standards and health; governance including diversity and management; or ethical issues like tobacco or animal welfare. There are also a few funds aimed at people of faith, for example Shariah funds following Islamic principles.
ESG is a broad banner that encompasses a wide range of different approaches, explains Jason Hollands, managing director at Tilney. “Here is the catch: every fund has its own criteria which can differ on issues such as animal testing, so if you are passionate about a particular issue, make sure the fund you choose is fit for purpose.”
Does your fund do what it says on the tin?
The difficulty is, sometimes funds don’t do exactly what their branding suggests, so investors can end up holding things they might not expect. “My view is that if investors don’t know what they’re buying, then we have a big problem,” says Dreblow. “Because, if people are trying to move away from coal, oil and gas, and dirty, polluting industries, for example, and they think that’s what they’ve bought into and they haven’t, then that’s greenwash.” She notes that this is a concern for the financial watchdog, the FCA, which is looking at creating a set of principles to make sure funds communicate clearly and that their investment strategy and aims actually align with what an investor might expect.
An easy way for investors to check is to look at the top 10 holdings of a fund – you’ll find this on the fund factsheet or on the ‘fund details’ tab on an investment platform. A low-carbon fund which has a top 10 full of oil majors, for instance, might give you pause for thought.
Sustainable fund ideas for your ISA
Here are some fund ideas to kick off your research, depending on which of the following statements is closest to how you feel about sustainable investing:
“I want to invest in ‘better’ companies that recognise the importance of sustainability, environmental and social issues.”
- Liontrust Sustainable Future Global Growth
- FP WHEB Sustainability
- Baillie Gifford Positive Change
“I want to avoid companies that have poor standards.”
- M&G Sustainable Multi-Asset
- BMO Sustainable Universal MAP Balanced
“I’m worried about climate change and want to avoid coal, oil and gas companies.”
- Pictet Clean Energy
- Jupiter Ecology
“I care about social issues like human rights, employment standards, child labour and diversity.”
- Aberdeen Standard UK Impact Employment Opportunities
- Threadneedle UK Social Bond
“I want to avoid arms and tobacco companies and companies with poor environmental and social standards.”
- Aegon Ethical Equity
- Unicorn Ethical Income
“I want to invest with a fund manager than encourages companies to improve.”
- Schroder ISF Global Sustainable Growth
- BMO Responsible Global Equity
“I am a vegetarian / vegan / want to avoid animal testing and invest in line with my lifestyle choices.”
- Aberdeen Standard Investments (ASI) Global Ethical Equity
- Liontrust UK Ethical
Categories courtesy of Fund EcoMarket.
- Moneyfacts/Lipper Investment Management. % growth as at 1 November 2020, total return, UK net, no initial charges.