Ethical funds come out on top in the battle for returns

Impact investing has come of age in spectacular fashion

Kate Hughes
Money Editor
Tuesday 28 July 2020 12:35 BST
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The days when investors either had to compromise on ethics or earnings appear to be well and truly over as a new in-depth survey reveals ethical funds consistently perform better than their non-ethical counterparts.

A study by Moneyfacts found that ethical funds available to UK investors have proved particularly resilient during the coronavirus pandemic, with the average ethical fund over 4.3 per cent growth over the last year compared with an average 1.5 per cent loss from non-ethical propositions.

The average ethical global fund – investing in ethically, environmentally and socially aware businesses around the world – was up by almost 15 per cent over the last year, easily eclipsing the average return of just 3.0 per cent from non-ethical global funds.

But the trend isn’t simply reflecting a boost to green industries or ethical businesses from governments injecting short-term economic stimulus while paying lip service to environmental lobbyists.

“The momentum behind responsible investing has been steadily building for some time, but there is a sense that a raft of new initiatives, changing regulation and some truly impressive sustainable fund performances could prove a catalyst for further growth,” said Richard Eagling, head of pensions and investments at Moneyfacts.

“The argument that investing responsibly must mean a trade-off between value and values or profits and principles has been increasingly debunked in recent years and the latest results of our ethical fund performance survey provide further clear evidence to refute it. Indeed, for any serious investor, sustainably-minded or not, the strong performance of ethical funds is now impossible to ignore.”

Over three years, the average ethical fund has produced growth of more than 18 per cent, more than double the growth produced by the average non-ethical fund. If this isn’t enough to convince sceptics of the performance potential of ethical funds then consider the 10-year and 15-year results, where ethical funds have returned 134 and 202 per cent respectively, a significant improvement on the average non-ethical fund returns of 103 and 156 per cent respectively.

Impact investing

“Investors are taking a far more active interest in the ethical nature of their funds than ever before, and are not satisfied merely by the financial performance of their portfolios,” says Keir Ashman, pensions and investments specialist at Bancroft Wealth.

“Nor is it the case that the choice between high growth and ethics is a binary one. More of today’s top-performing investments are in industries that are actively pursuing more sustainable, equitable ways of working; from ‘green’ technology, to renewable energy, food production, education, health and wellness and a host of others.

“Companies that are at odds with consumer demands will continue to suffer as shareholders make their needs understood by shunning these stocks from their investments. And it’s not just the obvious industries such as fossil fuels, tobacco, and arms; but also ‘fast fashion’, such as Boohoo, that are under pressure from all fronts, not least their shareholders, to change the way they operate.

If investors are after long-term, sustainable growth, then they can hardly invest in companies whose products and services are designed to be ‘throwaway’,” Ashman adds.

“Shareholder activism is a powerful thing, especially when institutional investors flex their muscles and send a clear message that certain companies will not benefit from their capital.”

How green is green?

But his comments come in the wake of a dramatic tumble in the share price of Boohoo this month after allegations were made about working conditions and pay at the fast fashion retailer’s Leicester factory – which the company disputes.

This was a business that had received high ratings for its environmental, social and corporate governance (ESG) by investment ratings providers, leading many big names and private investors alike to invest heavily, despite the notoriety of the fast fashion industry on ethical matters.

Millions of shares in Boohoo have now been offloaded by some of the biggest names in asset management and concerns have been raised that fund managers and individual investors are relying too heavily on ratings that are only really designed to be a starting point for further research.

The scandal highlights the ongoing problem of how to separate genuinely active businesses from greenwashing.

Investors are often surprised that what they thought was an environmentally orientated portfolio can still be full of tobacco or oil stocks as green credentials can range from those companies trying to do better to those achieving long-term fundamentally positive ESG results such as alternative energy firms.

“These shades of green indicate that it is clearly time to adopt industry-wide definition on what impact investing exactly is – and isn’t,” warns Adam Robbins, senior investment relationship manager at Triodos Investment Bank.

“This would make navigating the options for impact investment funds more straightforward, less confusing and less likely to disappoint those who wanting to proactively make their savings work for real, positive change.

“Until then, investors need to do their homework to judge whether specific investments, and the approaches taken by fund providers, are delivering positive impact they want to see in the world.”

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