It pays to invest ethically
23rd October 2015 09:32
by Adrian Lowcock from ii contributor
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Sunday saw the start of Good Money Week (18 to 24 October), which looks to promote ethical investing. The campaign, previously branded "National Ethical Investment Week", is in its eighth year.
Leading ethical benchmarks have beaten their non-ethical peers over five years. In the UK the FTSE4Good UK Benchmark beat the FTSE All Share Index, returning 48% versus 43% over five years to 8 October 2015.
Globally, the FTSE4Good Global Benchmark returned 62% compared to 60% for the MSCI World over five years to 8 October 2015.
The performance of ethical benchmarks over the last five years has been better than non-ethical counterparts. In my opinion much of this has been driven by the performance of oil and mining sectors which have suffered over the last few years.
Many ethical funds have no exposure to these areas and therefore have protected investors from the falls.
In addition ethical funds will have benefited from the outperformance of smaller and mid-sized companies. As a result of the filters ethical funds use there is a bias away from large companies which has also helped performance.
Three ways to invest ethically
Sustainable theme
Investing in companies which have sustainable business practices such as responsible uses of resources, good employment practices.
Sustainable investing is about the approach and not necessarily the sector the business operates in so offers a diverse range of investments. Fund managers look for companies which expect to benefit from their approach and have an advantage.
Environmental investments
Funds which significantly integrate environmental issues into their investment strategies. Fund managers make investment decisions by considering companies' environmental credentials alongside regular financial analysis.
Fund managers often take into account the extent to which companies are likely to benefit from the regulatory and legislative changes that are encouraging companies to adopt higher environmental standards.
Funds may group environmental issues together into themes such as waste, transport, clean energy and climate change.
Negative ethical funds
Apply clear, absolute and sometimes extensive negative ethical screening criteria alongside standard financial analysis.
Negative exclusions may be apparent when looking at stock selection as commonly held sectors or companies may be absent such as armaments trade, alcohol production, gambling and animal welfare.
These funds may also apply positive screening criteria but these will not override negative exclusions. A defining feature of these funds is their emphasis on traditional, values based ethical principles.
Three ethical investment ideas
Jupiter Ecology invests globally targeting companies which will make a positive impact on the environment, providing solutions to environmental and social problems.
A core dark green ethical fund, it applies an ethical overly to stock selection and will not invest in companies which derive more than 10% of their turnover from unethical sectors including tobacco, weapons, alcohol or gambling.
Pictet Global MegaTrend Selection does not have specific ethical requirements. Instead it is looking to invest into eight long-term megatrends, many of which are closely linked with the dominant long-term ethical themes.
Megatrends are described as those global developments which will have a profound effect on the progress of human civilisation over the coming decades. These themes include water, clean energy, agriculture and environmental stocks.
Manager Hans-Peter Portner invests across a range of sub funds, each of which is individually managed by sector specialists.
Axa Ethical Distribution is designed for more cautious ethical investors. Managers Jim Stride and Richard Marwood use their significant expertise to invest into UK companies' shares and bonds.
Companies are screened by EIRIS, global leaders in assessing each company's environmental, social and governance performance.
The fund is able to invest across the market cap spectrum with a focus on blue-chip companies aimed at reducing volatility. Equities can contribute up to 60% of the portfolio but typically sits at around 55%.
The remainder of the fund is invested in index-linked bonds to provide diversification and inflation protection.
Adrian Lowcock is head of investing at Axa Wealth.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.