Making money while supporting ethical and socially responsible causes sounds like a winning formula. While investors might fear that restricting the firms they can invest in will limit the returns they make, the performance of many ethical funds has been strong.
According to the Investment Association, net sales of ethical funds to retail investors last year totalled £807m, the highest figure on record. Yet it’s still a niche area — funds under management stand at £13.7bn, representing just a 1.2% of industry funds under management.
Positive discrimination
So what’s the deal? The way ethical funds are run has changed over the years. Traditionally ethical funds operated by simply banning certain companies which invested in industries such as tobacco, arms, oil and pornography.
Today their approach is different and fund managers actively seek out those companies that are doing some good. Fidelity International has compiled a list of the top performers accessible on its platform, over five years.
Ranking in first place is Impax Environmental Markets plc — an investment trust that invests globally in companies that provide environmental solutions through their products or services. Over five years it has returned 134%.
EdenTree Amity European is in second place returning 132%. It avoids alcohol, defence, gambling, mining and tobacco industries, instead backing companies that contribute to society and the environment.
Next is Henderson Global Care Growth which invests only in companies making ‘wise use of the natural environment’. It returned 124%.
However, past performance is no guide to the future, so it’s important you do your own research on what the funds are backing. There are lots of interesting companies to learn about. A recycling company called Umicore re-uses material to reduce waste. Cardboard box maker DS Smith recycles its own packaging rather than cutting down trees to make its products. Each box is typically recycled and remade an impressive seven times.
A more straightforward business is Acuity Brands which provides energy efficient LED lighting. The move to electric cars is tipped to be a strong theme in the future.
Should you invest?
Currently there are around 100 ethical and sustainable funds to choose from. The ethical standards that each fund runs to can vary hugely so you need to look under the bonnet of each individual fund to make sure you’re comfortable with what you’re money is backing.
The problem with ethical investing is that by narrowing down the number of firms you can invest in, it can be more difficult to generate returns. You also stand to miss out on huge bounces achieved by a price rallies in commodities and oil. But on the flip side, it’s definitely worth investigating for those who feel strongly about socially responsible investing.
