Published On: Sun, Aug 27th, 2017

Ethical investment funds: Five-minute guide to moral money management


|Ethical investmentsGETTY

Ethical investment funds aim to make money without causing social or environmental damage

It continues to divide investors today, with the rise of so-called “ethical” investment funds, which aim to make money without causing social or environmental harm. 

Ethical funds typically shun businesses that fall short of their moral criteria, such as environmentally damaging oil and mining firms, weapons manufacturers, tobacco companies and those involved in animal testing.

Some actively seek out businesses that aim to do good, such as renewable energy firms. 

Socially Responsible Investing, as it is also known, has struggled to convince investors, who assume they pay a price in the shape of fund underperformance. 

However, new figures suggest ethical funds have done far better than sceptics believe.

Solar farm ChinaGETTY

Ethical funds seek to invest in things like renewable energy

CLEAN AND MEAN 

The average ethical fund has returned 16.81 per cent over the last year, slightly ahead of the 15.20 per cent average return for non-ethical funds, according to new figures from MoneyFacts.co.uk. 

Top was the EdenTree Amity European Fund, up 33.4 per cent, while Unicorn UK Ethical Income and Standard Life Investments UK Ethical also returned more than 30 per cent. 

Ethical funds also outperformed over three years, but really excelled over five years, returning 76.1 per cent against just 64.1 per cent for non-ethical rivals. 

EdenTree Amity European, Liontrust Sustainable Future Absolute Growth and Henderson Global Care Growth would have more than doubled your money over that period. 

Richard Eagling, head of pensions and investments at MoneyFacts, says the traditional view that ethical investing requires a financial sacrifice now looks outdated: “Ethical funds have more than held their own recently, performance-wise.” 

He suggests that sustainable practices and good governance may give companies a competitive advantage. 

MORAL MAZE 

Investors must approach these figures with caution, says Jason Hollands, managing director of wealth advisers Tilney Investment Services: “Over time, ethical funds can lurch significantly between outperformance or underperformance.” 

One reason performance looks so good right now is that the oil and gas sector, which many ethical funds shun on environmental grounds, has endured a rocky few years. 

Over 10 years non-ethical funds came out on top. He adds: “If oil and gas recover ethical funds could find themselves back in the relative doldrums.”

Hollands says ethically-minded investors must understand that performance can deviate significantly from the wider stock market, but adds this will not worry those who put morality before money: “Tobacco companies can offer great returns, but that will not sway somebody who does not want to invest their cash in cigarettes.” 

He tips Kames Ethical Equity, Standard Life UK Ethical and F&C Responsible Global Equity. 

THINK SMALL 

Another problem is that ethical funds tend to focus on just a handful of sectors that meet their criteria. 

MoneyToTheMasses.com founder Damien Fahy says: “This leaves you exposed to a relatively small investment universe, notably technology and financial stocks.” 

Ethical funds are heavily weighted towards smaller firms rather than those with a dirty global footprint. F

und managers also have different views of what makes an ethical company, and this may not match your own. 

“Investing ethically is a minefield. I have seen funds invest in oil stocks that have engaged in Arctic drilling or banks accused of rate rigging and money-laundering,” says Fahy. 

His preferred ethical funds are Liontrust Sustainable Future UK Growth, EdenTree Amity European and Royal London Sustainable World Trust. 

Eagling says investors are likely to remain sceptical despite recent successes: “More than 30 years after the first ethical fund was launched the sector accounts for just 1.2 per cent of investment under management.”

Investment GETTY

These funds tend to focus on a small investment universe

THINK SMALL 

Another problem is that ethical funds tend to focus on just a handful of sectors that meet their criteria. 

MoneyToTheMasses.com founder Damien Fahy says: “This leaves you exposed to a relatively small investment universe, notably technology and financial stocks.” 

Ethical funds are heavily weighted towards smaller firms rather than those with a dirty global footprint.

Fund managers also have different views of what makes an ethical company, and this may not match your own. 

“Investing ethically is a minefield. I have seen funds invest in oil stocks that have engaged in Arctic drilling or banks accused of rate rigging and money-laundering,” says Fahy. 

His preferred ethical funds are Liontrust Sustainable Future UK Growth, EdenTree Amity European and Royal London Sustainable World Trust. 

Eagling says investors are likely to remain sceptical despite recent successes: “More than 30 years after the first ethical fund was launched the sector accounts for just 1.2 per cent of investment under management.”


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