Ethical Investing  

Choosing the best Ethical funds

Ethical investment vehicles have attracted some criticism since they first appeared on the scene, but over the years they have gained many more loyal advocates. The most prominent of these appeared a few weeks ago, in the form of the regulator.

FCA chief executive Andrew Bailey points to two investment trends – the rise of both passive and ethical funds – as growth areas of the future. He notes that these offerings should not only “coexist”, but receive some form of backing from the watchdog.

“An industry that enables the support of patient capital and innovation, and of ethical investment and social responsibility, will be one where the trust will be stronger and deeper, and the culture will prosper. The regulator can help by enabling change to happen,” he says.

Mr Bailey’s comments come at a time when ethical funds – and other investment approaches that factor in sustainable or environmental concerns, or even just particular views on how companies should be run – are attracting attention like never before. From advice firms to wealth managers and fund houses, specialists have increased their focus on these areas, citing rising client demand. And research suggests the industry is at a tipping point.

Schroders observes that more than half of investors have increased their sustainable investment allocations in the past five years. On another front, Triodos Bank has forecast the UK market for socially responsible investing to grow by 173 per cent from now until 2027, reaching £48bn in size.

As demand continues to rise, intermediaries would do well to assess which funds are serving clients best while also catering to their beliefs. But this remains difficult for multiple reasons.

Needles and haystacks

Expansion in this space is leading to a confusing array of products. Ethical funds and portfolios may be available, but so are offerings that focus on all manner of other separate concerns, including the likes of environmental, social and governance approaches, impact funds and SRI. 

Such preferences are likely to evolve further, and this is not helped by the fact that the same terms can be used to mean different things, making it difficult to choose, or compare, relevant funds. The problem is compounded by the fact that ethical funds are not given a peer group: when it comes to the Investment Association, many are grouped according to the main asset class or region in which they invest, while others sit in the Specialist sector.

But while interest in ethical investing and related approaches is gathering significant momentum, this has not translated into assets under management. In August, ethical funds held nearly £17bn, according to the IA. This figure alone does sound significant, but it makes up just 1.3 per cent of the industry total and is barely higher than the 1.2 per cent taken up by ethical funds 10 years ago.

If these funds are so popular, why are they so light on assets? Several possible reasons exist.

First, the nature of the funds’ most prominent supporters offers an explanation. Millennials are tipped as the generation that will help such products gain scale – but much of this generation is still too young to generate significant assets, or commit heavily to investing. If this argument holds up, the relevant funds could experience an uptick in assets in the future.