Demand from investors has been growing for funds that combine financial returns with a social conscience. Over £16.7 billion is under management in ethical funds, a threefold increase over the past 10 years, according to figures from the Investment Association published in July.
While this is a very small proportion of the total amount invested in funds, many mainstream funds are starting to look at environmental, social and governance (ESG) factors as part of their investment process.
Recent legislation from the Department for Work and Pensions stipulates that pension trustees must now look at longer-term risk factors such as climate change. The FCA will also be consulting on this issue during 2019 in relation to pension funds.
Those that support responsible investment approaches argue this isn’t just about doing the right thing: it is about managing longer-term risks and generating sustainable returns.
For example, some share prices may be adversely affected by such factors as climate change, or a poor health and safety record. Applying ESG factors may also help identify companies that could benefit by switching from investing in fossil fuels to renewables.
Understanding the ethical market
For those seeking a more principled approach to their pension or ISA savings, it is important to understand some of the different terms and approaches used.
Dark Green Funds: These funds follow strict ethical guidelines and typically screen out certain sectors completely, such as armaments, fossil fuels, tobacco or gambling industries.
Light Green Funds: These funds have a less strict remit. ‘Light green’ funds take a ‘best of breed’ approach. For example, rather than avoiding all oil companies they may invest in those with the best track record of developing renewable energy, or the most ethically responsible companies in their field.
ESG Factors: Fund managers may look at ESG factors as part of their stock selection process. This means looking at a company’s track record on issues such as climate change, waste and pollution, deforestation, working conditions, employee diversity, health and safety, executive pay, board structure and tax strategy. Funds that apply an ESG process don’t necessarily screen out any sectors, but they aim to invest in companies that have good ESG practices.
Impact Investing: Rather than avoiding certain sectors, your money can be invested in companies or projects that have the potential to deliver positive social or environmental outcomes.
Sustainable, responsible and impact investing (SRI): This umbrella term covers an investment strategy that accounts for both ESG factors, and a positive societal impact. The aim is to deliver long-term returns for investors.
Remember when choosing funds that these terms aren’t necessarily mutually exclusive. It is possible to have a dark green ethical fund, which screens out certain sectors, but also considers ESG factors to help decide which other companies to invest in.
Please get in touch to discuss your ethical investment options.
The value of your investments, and the income from them, can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.