Returns comparison for Ethical Investment vs Traditional Vehicles
The only way is ethics: Can a socially responsible approach to investing really make you money?
56% of UK investors have upped their stake in ethical funds in past five years
Leading ethical stock market indices have beaten their non-ethical counterparts
But there can be a huge cost to investors going ethical-only
PUBLISHED: 15:54, 2 October 2018 | UPDATED: 17:49, 2 October 2018
Ethical funds are increasingly popular with 56 per cent of UK investors having upped their allocations to them over the past five years, according to fund house Schroders.
Such funds are increasingly popular, with younger generations placing greater emphasis on a socially responsible approach to investing, but also big investors – such as pension funds – seeking to back an ethical stance.
But can you really achieve healthy returns by investing with an ethical slant? We take a look.
There’s now a plethora of investment opportunities under the ethical banner to sift through
What is ethical investing?
Ethical investments traditionally excluded companies that make weapons, partake in animal testing or invest in the gambling industry.
But backing investments that can be a force for good is not just about the traditional notion of ethical investing – avoiding sin stocks, such as tobacco and arms firms.
The world has moved on and investors can now back the companies shaping the future world we will live in and doing business in a better way, through impact investing and environmental, social and governance (ESG) factors.
These are the companies picking up on the desire of governments, global organisations and individuals, to improve the world – ranging from the rise of electric cars, to having enough water and cracking down on plastic waste.
The argument for this approach is simple: investors can use their cash to influence companies to be more socially and environmentally responsible – and profit from future trends.
Do ethical investments offer good returns?
It depends on who you talk to. Yes, going by the latest index statistics. Leading ethical stock market indices have beaten their non-ethical peers over five years.
Across the Atlantic, the FTSE4Good US Index returned 155 per cent compared to 129 per cent for the S&P 500 over five years to 28 September 2018.
GOOD MONEY WEEK
This week is Good Money Week, an independent campaign run by the UK Sustainable Investment and Finance Association attempting to convince people that the only way is ethics when it comes to investing.
The theme of this year’s campaign focuses on the barriers preventing women from investing.
The cold hard fact is that fewer women invest than men. Women take out a fifth fewer stocks and shares Isas than men, according to government figures.
Yet the need for the better returns that investments could provide is arguably greater for women – given that they live longer, earn less than men on average and often take breaks in their careers.
A poll by DIY investment platform Hargreaves Lansdown found that only one in five women is fully confident about their financial future.
The study found a lack of knowledge was the most common barrier to investing.
The second biggest barrier is an aversion to investment risk.
Sarah Coles, personal finance analyst, at Hargreaves Lansdown, said: ‘On average women have lower, less secure incomes than men, so some struggle to find the money to invest.
‘However, they have 19 per cent more in cash Isas than men do, so there is some money available somewhere. It means there may be more to this than simple affordability.’
The performance gap is even wider over 10 years (349 per cent versus 297 per cent).
In the UK, the FTSE4Good UK index beat the FTSE All Share Index, returning 43 per cent versus 42.5 over five years.
The index of the UK’s ethical stocks trails the performance of the FTSE All Share – but only by a tiny margin (136 per cent versus 134 per cent).
Adrian Lowcock, of investment platform Willis Owen, explains: ‘Much of this has been driven by the performance of oil and mining sectors which have lagged the market over the past 10 years as well as, more recently the tobacco sectors.
‘Many ethical funds have no exposure to these areas and have therefore protected investors from the falls.’
He adds: ‘The evidence is growing that companies which behave responsibly and incorporate environmental, social and governance principles into their businesses are better custodians of those companies and in turn provide better long-term returns for investors.’
Ethical bias could cost you returns
It’s not all rosy though. Research by research firm FundExpert suggests there is a huge cost for ticking an ethical box.
Its study focused on the performance of ethical funds in the UK All Companies and Global investment sectors as 43 per cent of the 78 ethical funds in market sit in these Investment Association defined sectors.
The firm’s analysis found that if you had invested £100,000 a decade ago in the best ethical fund in the UK All Companies and Global investment sectors you would be £230,040 and £302,650 worse off respectively than if you’d put that money into the best unconstrained fund.
Furthermore, there are 17 ethical funds in the UK All Companies sector, which represents 20 per cent of funds of this type available to investors.
Only one fund, Standard Life Investments UK Ethical, makes it into the top 20 per cent best performing funds in this sector over 10 years, achieving a return of 162 per cent.
But the performance of the fund is 230 percentage points less than the 392 per cent return generated by Slater Growth, the best performing fund.
When it comes to the Global sector, which holds 18 ethical funds representing 23 per cent of all ethical funds, none make it to the top 20 per cent list.
The best performing ethical fund, F&C Responsible Global Equity, returned 186 per cent – 302 percentage points less than Baillie Gifford Global Discovery, which returned 488 per cent making it the top performer in the sector over the past decade.
Ethical investments typically exclude companies that make weapons, partake in animal testing or invest in the gambling industry.
Who should you believe?
Admittedly, we’re not comparing apples with apples here. On one hand, you have a pair of indices tracking so-called ethical stocks.
On the other, you have research based on the performance of different ethical funds.
In truth, if you’re genuinely wedded to the idea of investing in something that marries up with your ethics, a comparison between the performance of ethical investments against the unconstrained equivalents shouldn’t really have much baring on your decision.
You should instead focus on finding the best options from the pool of available ethical investments.
There’s now a plethora of investment opportunities under the ethical banner to sift through but they’re not all the same, so it is important for investors to do their research before committing their cash.
To help you on your way, we’ve asked Damien Lardoux, portfolio manager of boutique wealth manager at EQ Investors, to to recommend four funds for ethical investing. Here are his picks:
Hermes Impact Opportunities Fund
Ongoing charges: 0.95%
Launched in 2017, the Hermes Impact Opportunities fund targets companies which are developing new solutions to tackle social and environmental issues.
With an aging population, a rise in the number of cancers and auto-immune diseases, health and well-being is a key theme within the fund.
Allianz Green Bond Fund
Ongoing charges: 0.47%
The Allianz Green Bond fund offers an opportunity to invest in green bonds which are fixed income instruments where the proceeds are exclusively assigned to finance green projects in sectors such as energy efficiency, pollution prevention or renewable energy.
FP Wheb Sustainability
Ongoing charges: 1.03%
The FP Wheb Sustainability fund looks to hold a portfolio of stocks from a universe of stocks that play into nine identified social and environmental themes such as resource efficiency, sustainable transport, education or healthcare.
We really like their commitment to measure the impact achieved by their investments.
Threadneedle UK Social Bond Fund
Ongoing charges: 0.45%
The Threadneedle UK Social Bond fund tries to achieve a positive social impact by investing in listed bonds issued by organisations that support socially beneficial activities and balanced economic development, primarily in the UK.
Key social themes include employment, education, social housing, transport and infrastructure.
Ethics. What ethics?
How impact investing can profit from shaping our future
Not all propositions classified as an ethical investment are the same, so it is important for investors to do their research before assuming they subscribe to your version of ethical.
There are three main strategies that have stemmed from the concept of investing in a way that has a positive impact on the world.
One of the most common forms of this is ethical investing – the practice of excluding controversial sectors such as tobacco and armaments as well as those involved in animal testing.
Meanwhile, sustainable investing involves selecting companies for positive environmental, social and governance initiatives.
Firms that reduce their carbon footprint and those with good corporate governance structure would make the cut.
Crucially however, this strategy does not factor in the impact of the product or services.
Impact investing, on the other hand, goes a step further. This type of investing seeks out companies, organisations, and funds with the intention to generate social and environmental impact through their products, services and business practices.