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Fund Review: Sustainability

Introduction

For some it’s a focus on corporate governance or ethical issues, while for others it’s about resource efficiency, tackling issues such as water scarcity and climate change.

Whatever your definition, it’s an approach that is becoming much more mainstream.

Next month marks the first Global Ethical Finance Forum in Glasgow, which aims to bring together key players in ethical finance and responsible investing to boost co-operation.

Meanwhile Good Money Week in October, formerly National Ethical Investment Week, aims to raise awareness of sustainable, responsible and ethical finance “to help people make good money choices” when investing.

Some investors may still consider sustainable or impact investing – a form of socially responsible investing where there is a measurable ESG impact alongside an investment return – a niche area. But it’s no longer a choice between ‘good’ investment choices or good returns.

Amy O’Brien, managing director and head of TIAA-CREF’s responsible investment team, says that in the past some investors have equated responsible and sustainable investing with lower returns.

“That is still one of the challenges that remain. I think as investors get more comfortable, have more education on this, they realise that’s not necessarily the case.

“In fact there are competitive funds. You have to do your research and look at all investment fundamentals alongside ESG and impact features you might be interested in. I do think it’s still a barrier that is being overcome.”

But the industry is clearly addressing this, with Morningstar recently announcing plans to launch environmental, social and governance (ESG) scores for global mutual and exchange traded funds.

Jon Hale, Morningstar’s director of manager research, North America, says: “We have a long tradition of innovative research centred on good stewardship, lower costs, and more transparency for investors.

“Providing fund scores on environmental, social, and governance factors is a natural extension of our work. We want to bring even greater transparency and accountability to the investment industry with ESG research, data and tools, while helping investors put their money to work in ways that are meaningful to them.”

Morningstar points out that interest in ESG and sustainable investment practices is growing, with a study from the Morgan Stanley Institute for Sustainable Investing in February revealing that 71 per cent of individual investors are interested in sustainable investing.

Meanwhile the United Nations-supported Principles for Responsible Investment (PRI) Initiative currently has 1,392 signatories, including 913 asset managers. These include a number of large UK names such as Aberdeen, Artemis, Jupiter and Schroders.

Within the responsible investment space, Ms O’Brien says the term ‘impact investing’ has gained traction in the past five to seven years.

She explains: “Many clients find that phrase very appealing because they are looking for ways to make a difference, and more investors than ever before are interested in linking capital to their global sustainability concerns and values.

“I think by phrasing a lot of the work under that umbrella, the concepts are getting traction… away from more of the historical concepts associated with the industry which dealt with exclusions and avoiding things. This is really about what to support.

“I do think that some of the original types of exclusions are still very important. I’d say we’re experiencing an expansion in that direction of proactive, positive impact type of investing,” she adds.

THE PICKS

Alliance Trust Sustainable Future UK Growth

Launched in 2001, this £214.8m fund is one of a number of Alliance Trust sustainability-focused vehicles. Managed by Peter Michaelis with Neil Brown as co-manager, the aim is to invest in diversified portfolios of companies that are “more sustainable than the market, have good business fundamentals and are undervalued”. The team focuses on four main investment themes to identify companies providing potential solutions to a range of sustainability challenges, including climate change and energy efficiency. The fund’s five-year return of 80.82 per cent has outperformed both the FTSE All-Share index rise of 56.65 per cent and the IA UK All Companies sector average return of 67.81 per cent.

First State Worldwide Sustainability

Launched in November 2012, this £152.4m portfolio is managed by David Gait and Nick Edgerton. The aim of the fund is to invest in companies that benefit from and contribute to the sustainable development of the countries in which they operate. Just shy of its three-year anniversary, the fund’s one-year performance is strong, with a 12.28 per cent return for the 12 months to August 12 2015, compared with the 10.66 per cent rise in the MSCI AC World index and the IA Global sector average of 9.54 per cent.

EDITOR’S PICK

Royal London CIS Sustainable World Trust

Managed by Mike Fox, this £165.8m fund aims to provide medium- to long-term growth in multiple asset classes. The aim is to invest in growing, innovative companies that provide solutions to key social issues and show leadership in ESG management. Launched in 2009, the fund first appeared in the Investment Adviser 100 Club in 2015 with a five-year return to August 12 of 81.1 per cent, compared with the 43.43 per cent average from the IA Mixed Investment 40-85% Shares sector.

In this special report