Petrol and diesel car ban puts spotlight on ethical funds

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Petrol and diesel car ban puts spotlight on ethical funds

The government's plans to ban new petrol and diesel cars from 2040 has raised questions about whether investors should turn their portfolios green as well as their vehicles.

News today (26 July) that the government doesn't want any petrol or diesel cars on the road by 2050 highlights the topic of green, socially responsible and ethical investing, as investors eye electric car maker shares and clean energy funds instead of the traditional auto and oil major stocks.

 According to the Investment Association, net sales of ethical funds to retail investors last year totalled £807m, the highest figure on record.

But not all IFAs are seeing this demand reflected among their clients.

Mike Batty, a director at Birchwood IFA, said ethical or SRI-focused clients remain a fairly small part of his firm’s client base, though his advisers do raise the issue often.

“When our advisers are speaking to people about this, the response is perhaps 10 per cent or 15 per cent of people would be interested in that area and have strong feelings about it.

"When it comes to investing, people are interested in two things only: return and risk.”

He said there was “a great deal less choice” in the area of ethical investing, but said there are some good options available.

“You can get reasonable performance but, it’s a shame, you can’t get the same spread as you can with traditional investments.”

Figures from Markit showed the top 10 per cent of North American shares by ESG (environmental, social and governance) Rating represented the best performing end of the market.

They returned nearly a third more than all North American shares have delivered since 2012.

Andy Hillier, financial advice partner at ethically-focused firm Castlefield, said the perception that it is mainly Millennials driving growth in SRI investing is not necessarily true.

He said: “We see it as a growing movement among individuals of all ages.

"Many people have been taking this view on their investments for many years, there are a number of people from different generations and from all walks of life who want to take a greater degree of consideration into where their money will be placed.

"There is greater awareness now of some of the world’s problems.”

He also believed it is entirely possible to deliver the performance clients want while still investing according to their values.

Mr Hillier said: “The whole ethos of ethical investing is to get a return without compromising on social or environmental principles.

"This doesn’t preclude them making a good return. When you are looking at ethical investing, you are not looking at now but at the future. The move to electric cars, for example, will be a strong future theme.”

He emphasised the need to "look under the bonnet" to understand what holdings a fund has and how it screens them.

Some of the funds and providers his firm has previously recommended include WHEB Sustainability fund and Alliance Trust Investments, both selected for transparency and good performance.

He also likes the Premier ConBrio BEST Income fund for delivering a high level of income with no exposure to fossil fuels.

Other favourites are the Quilter Cheviot Climate Assets fund for its strong focus on those sectors which could benefit from a low carbon future, and the Impax Environmental Markets investment trust, which was the first UK-listed equity fund to demonstrate a net positive carbon impact. 

Anna Sofat, founder of advice firm Addidi Wealth, said ethical spending more broadly has exploded in recent years, and this extends to choosing service providers and investing.

But the issue of returns is a thorny one.

“Morally, there can be a conflict between investing responsibly and achieving maximum investment returns from your portfolio,” she noted, adding oil, tobacco and alcohol stocks are key market drivers.

She said: “Ultimately, choosing an ethical fund simply reduces the pool of stocks available to choose from; not necessarily pertaining to stocks of lesser quality or potential. As with any approach to investment, it’s a case of balancing up the pros and cons.

"Choosing an ethical route will likely have to be driven by a balance of looking to approach investment from a ‘conscious’ perspective while simultaneously looking to achieve steady, if not necessarily significant returns.”