Jessica Ground, global head of stewardship at Schroders, points out: “People’s ethics vary – and some might be against tobacco and alcohol, for example, which will have the impact of excluding some high-yielding sectors”.
Charlie Hamilton, investment analyst at Tatton Investment Management sounds a similar note of caution: “In the equity space, it can prove troublesome seeking income through ESG investing because the big dividend paying companies, for instance, defence, tobacco and alcohol businesses are excluded from the investment universe.”
Further highlighting the challenge faced by ethical investors, Mr David adds: “Of the total paid in dividends by FTSE 100 companies in 2016, almost 40 per centcame from just five stocks: Royal Dutch Shell, HSBC, BP, GSK and Vodafone. A number of these companies would potentially fail many ethical or ESG investors’ screens.”
There are other screening outcomes to be considered, as Mr David explains: “The constraints are greater where the ethical screens applied are comprehensive and less so where a more generic ‘best in class’ approach is adopted.
"In practice, for equity investors, the greater the degree of screening, the more a portfolio’s bias shifts from large-cap stocks to those in the mid-cap space."
He comments this is an important fact when one looks at the average FTSE 100 yield of 3.9 per cent, versus the FTSE 250 yield of 2.7 per cent (as at February 2018).
There is a potential way around the dilemma of the composition of the FTSE100, though, as Mike Appleby, investment manager at Liontrust Asset Management, observes: “Given that the FTSE 100 top 10 companies contain a number of companies which are uninvestable from an ESG perspective, it could make more sense, from an ESG perspective, to invest in a global equity income fund than a UK one.”
Opportunity knocks
Despite the challenges, there is nevertheless opportunity for equity income seekers in ESG, as Mr David explains: “There are plenty of ethically acceptable stocks offering attractive yields, as is evidenced by the yield available on a number of UK ethical equity funds.
For example, Janus Henderson Responsible Income Fund yields 3.7 per cent, and F&C Responsible UK Income Fund yields 3.9 per cent.
Mr David adds: "So with thoughtful selection, equities or equity funds can be found that compensate for much of the ‘lost’ income, particularly when carefully managed as part a of a more diversified portfolio.”
And new opportunities are coming to light, as he adds: “We have seen a number of new income opportunities emerge in the ethical investment space over recent years, notably renewable energy infrastructure funds and social housing investment trusts.
