Introduction
Environmental, social and governance (ESG) research provider EIRIS estimates that at the end of July 2015, more than £15bn was invested in UK ethical and green funds. These are just two of the types of funds available, along with socially responsible (SRI), ESG, environmental and impact investing, among others.
Some may consider this type of investing too niche, or an example of investors sacrificing returns in order to feel good about themselves. But data from FE Analytics shows the FTSE4Good Global Benchmark index gained 77.3 per cent in the five years to July 25 2016, outperforming the MSCI World index gain of 75 per cent. The FTSE4Good UK Benchmark index has risen 45.4 per cent in the same period, beating the FTSE All-Share index’s 41 per cent gain.
Although some funds at the ethical end of the spectrum may still focus on a more ‘dark green’ methodology, excluding sectors such as weapons, tobacco and alcohol, many are reaping the benefits of technology in areas such as resource efficiency, clean energy, carbon emissions and environmental solutions.
In July, Jupiter introduced the Global Ecology Diversified Sicav fund with the aim of investing in companies that will benefit from the transition to a sustainable economy. In addition, this year’s Investment Adviser 100 Club features two funds with a specific sustainability mandate, showing this approach can deliver consistent performance.
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Jupiter Ecology Managed by Charlie Thomas, this £476m fund, launched in 1988, aims for capital appreciation and a growing income by investing in companies that demonstrate a long-term commitment to the environment. It has outperformed its IA Global sector peers across one, three and five years to July 25 while its 10-year return of 107 per cent is well ahead of the 93.3 per cent sector average, data from FE Analytics shows. The largest sector weighting is to support services at 17.7 per cent, while the largest geographical allocation is to North America at 38.7 per cent. Kames Ethical Equity This £566m fund is managed by Audrey Ryan with the aim of maximising total return by investing in UK-based companies that meet its ethical criteria. Launched in 1989, it has a strong long-term performance, including a 10-year return of 124 per cent compared with the IA UK All Companies sector average of 73.7 per cent. Shorter-term performance has struggled, however, with its 12 month loss of 2.1 per cent to July 25 lagging the sector average gain of 0.4 per cent. The largest sector allocation is to financials at 30.3 per cent. EDITOR’S PICK Stewart Investors Asia Pacific Sustainability A returning member of the Investment Adviser 100 Club in 2016, this £359m fund, managed by David Gait and Sashi Reddy, was launched in December 2005 with the aim of investing in companies in the Asia-Pacific region that are positioned to benefit from and contribute to the sustainable development of the countries in which they operate. Its performance has been consistently strong, delivering a 10-year return of 353 per cent compared with the IA Asia Pacific ex Japan sector average of 151 per cent. The fund has also significantly outperformed the sector across one, three and five-year periods to July 25. The largest sector weighting is to consumer staples at 23 per cent. The largest country allocation is to India at 36.3 per cent. |
When it comes to passive investors, index providers are creating new indices – from SRI to ESG to low carbon – and BlackRock has launched sustainable equity exchange-traded funds for emerging markets and the US.
Mike Fox, manager of the Royal London Sustainable World Trust, notes: “If you are investing in companies that are dealing with genuine social problems, then that should be more profitable and that’s been our experience.”
Investec Asset Management’s multi-asset team suggests 2016 is the year ESG starts to come to the fore. Factors include the COP21 agreement, the Volkswagen emissions scandal and shareholder activism over issues such as executive remuneration.
Its mid-year investment outlook states: “Attention to ESG is not new and many investors, especially those in Europe, will claim to integrate ESG considerations into their investment processes.”
It adds: “We expect shareholders will become increasingly frustrated with boards if performance continually fails to meet expectations. We believe that can only be a force for good. Investment in low-carbon and energy-saving technologies will also become an important consideration in the portfolio construction process as governments strive to meet the [targets] set out in Paris. Even in the oft-neglected social aspects of ESG, we believe there will be momentum as investors seek less-crowded, high-growth areas to drive future returns.”
With COP21 and a global agreement on climate change at the end of 2015 bringing the issue into the spotlight, the benefits of sustainable investing may be becoming clearer to all types of investors.
