In recent years there has been growing interest in unit and investment trusts offering portfolios of shares focused on companies considered to be “sustainable”, “socially responsible” and “ethical”.
But what do these terms mean exactly? How are such companies selected? And how have these trusts and funds been performing?
Such attributes can be hard to define. Opinions about what constitutes “ethical” investment vary widely.
And if there is one word that creates the greatest confusion it is the near ubiquitous description “sustainable”. Does it refer to longevity? Or the resources used to manufacture them? Or the business model adopted?
“Sustainable” should not be a disincentive to change. For central to any capitalist economy is innovation and adaptation.
Products and services are constantly updated or superseded in response to changes in consumer tastes and preferences. So we need to take care over what is described as “sustainable”
There are other pitfalls. Perceptions of “good” corporate governance can be swayed in favour of corporate behemoths with big PR budgets. Oil companies and drinks giants constantly promote their social responsibility and environmental credentials. Does this qualify them for inclusion in an “ethical” fund?
There are broadly two approaches to “good” investing. One is negative screening. This works to exclude companies that produce weapons, tobacco, alcohol, pornography, gambling and nuclear power.
The other is positive screening: focusing on companies that make a positive environmental, social and governance contribution by, for example, having good human rights, labour rights and equality records.
Rathbone Greenbank Investments, which specialises in ethical and socially responsible investment suggests we apply our own positive screening by investing in sectors such as renewable energy, healthcare, education and affordable housing.
It cites the Impax Environmental Markets Investment Trust which invests in innovative companies within energy efficiency, alternative energy, water, waste and sustainable food, as examples of how positive, ethical investments result in positive returns. The trust has risen by more than 150 per cent over the past five years.
Investing ethically can also bring about corporate change. Shareholder rights can be used to vote at annual general meetings guiding the direction of companies, on issues including executive pay or social and environmental reporting. Investors could consider getting actively involved by attending or voting at AGMs.
People can check what actions their investment manager is taking to ensure responsible investment practices – whether their investment manager has signed up to any of the bodies designed to enhance responsibility in investment (for example the UN-backed principles for ethical investment).
For all the coverage of the ethical investment sector over the past few years, it accounts for just £12 billion of assets under management in a UK fund management industry with total assets of £950bn.
Out of a universe of 3,300 unit trusts there are 100 with an ethical or corporate responsibility focus. Major groups in this field include Dundee-based Alliance, Standard Aberdeen, Baillie Gifford, F&C, Henderson, Schroder and Jupiter.
What of performance? According to recent research from fundexpert.co.uk only three ethical funds out of 35 make it into the top performing 20 per cent of all funds over 10 years. The three funds are: Henderson Global Care Growth, EdenTree Amity International and Stewart Investors Asia Pacific Sustainability.
In the investment trust space, there are nine trusts but the main leaders in addition to Impax Environmental Markets are Jupiter Green and John Laing Environmental Assets.
Volatility can be an issue as ethical funds avoid defensive sectors of the market such as tobacco and have a greater weighting to cyclical stocks.
However, supporters of ethical funds can point to superior performance when comparing the FTSE 100 index and the FTSE4Good, which includes those companies demonstrating strong environmental, social and governance practices.
This shows a different conclusion. While the FTSE 100 index of blue-chip UK companies has returned 65 per cent in the ten years to last October, the FTSE4Good has outperformed by 3 per cent, returning 68 per cent.
Websites such as Trustnet carry details of most unit and investment trusts and their performance over one, three and five years.
Aspiring “social responsibility” investors can also obtain guidance from the UK Sustainable Investment and Finance Association set up to advise the finance industry and the public on ethical investment.