David Attenborough has helped make caring about the environment mainstream and more investors are putting their money where their morals are and being rewarded with stellar returns. The 93-year-old broadcaster’s Blue Planet series, which showed shocking images of oceans polluted by plastic, pricked the nation’s collective conscience into thinking about the impact their lives have on the planet.
Whereas once caring about the environment was considered the preserve of hemp-wearing hippies, or not considered at all, now everyone wants to make a difference. Many investors are making a difference through the funds they choose, with a huge increase in money placed into ESG funds that take into account a company’s ‘environmental, social, and governance’ policies.
Meanwhile, ethical investing – which also comes under the guise of ‘socially responsible investing’ (SRI) – has also become big business in recent years.
According to the Global Sustainable Investment Alliance, $23 trillion is currently invested globally in ESG funds. An investor study undertaken by Schroders last year revealed half of UK investors had increased their sustainable investments over the past five years, with the number rising to a huge 85% for investors aged 18-to-36.
Analysis by broker AJ Bell of the 74 ESG funds on its investment platform shows that over the past year 47 have seen inflows totalling £3.57 billion while 27 saw a total of £603 million withdrawn. Not surprisingly, the ESG fund providing the biggest return over five years also attracted the most money in the past 12 months.
Vontobel Sustainable Emerging Markets Leaders, a Luxembroug-based, dollar-denominated fund has grown to $4 billion since its launch eight years ago.
Fund managers Thomas Schaffner and Roger Merz focus on companies that contribute to sustainable economic activity, such as businesses that bring banking services to those who would not have had access before. It has 39% invested in China and its top holding at 5.2% of assets at the end of June was Tencent Holdings, the giant internet platform operator.
The fund has seen inflows of £1.1 billion over the past year due to its significant outperformance over the past five years, delivering returns of 108.7%. And investors haven’t been too disappointed over the past 12 months, receiving returns of 10.4%.
However, Vontobel could see its position usurped if star fund manager Terry Smith (pictured above) can sustain the 17.18% return from his Fundsmith Sustainable Equity fund this year. The Citywire AAA-rated manager’s £289 million fund, which was launched at the end of 2017, is the top performer over one year according to AJ Bell’s.
Although the fund makes it onto the top 10 list of fund inflows for the year, it is only seventh on the list after seeing assets under management rise by £122.6 million.
The fund attracting inflows are typically also the newer launches, according to AJ Bell’s analysis. Laura Suter, personal investing expert at the stockbroker, said it is ‘potentially because of the marketing that would have been done around them’.
“As more people are interested in ethical funds, asset managers launch more funds but also put marketing budget behind those funds, helping to attract inflows,” she said.
There has been no shortage of launches either, with Aviva Investors being the latest to join the fray this month with its new Sustainable Income and Growth fund. It aims to deliver income of 5% as well as capital growth by investing in companies with sustainable business models.
While ethical funds may aim to do good, not all of them do well, and where this is the case investors are voting with their feet.
While not the worst performer by a long way, index-tracking fund Vanguard SRI European Stock saw £250.6 million removed by investors over the year. It has delivered 43.94% over five years and 2.59% over one year but investors were more concerned by the stocks it was tracking.
While most SRI funds screen out controversial companies in areas such as fossil fuel and tobacco, the top 10 stocks in Vanguard included Royal Dutch Shell (RDSA) and around 7% of the fund is invested in the oil and gas sector, which seems to be enough to put investors off.
Proving that performance is king for ethical investors, the second largest outflows were seen at £454 million Kames Ethical Cautious Managed, which is the worst performer in AJ Bell’s list over five years and second worst over one year. Investors in the Audrey Ryan-managed fund saw declines of 1.41% over one year and a return of just 24.9% over five years, prompting investors to pull £97.6 million from the fund over the past 12 months.
Ryan has not had any more luck with her £549 million flagship Kames Ethical Equity fund, which was the first ethical fund launched by the asset manager in 1989, as it delivered the worst one-year return of -5.09%. It hasn’t offered investors much more excitement over five years, returning just 30.2%.
The strict criteria Ryan runs the fund by means around half of UK’s largest stocks are excluded – including companies involved in the production of meat and dairy – and the focus on small and mid-cap stocks has seen performance deteriorate as economic and Brexit fears intensified.
Fund managers are becoming more active in sustainable investing with groups this week calling on cement manufacturers to cut their carbon emissions.
A survey of asset managers by NN Investment Partners showed 61% believe they make a tangible, positive impact on society and 70% have a comprehensive long-term responsible investing policy in place. Suter said even fund managers without a specific ethical mandate are considering the ethical implications of their investments.
“Different groups take different approaches, some feel that it’s better to be invested in the so-called ‘dirty’ companies as you then have a shareholder vote and you can push for change internally, while others will avoid them altogether,” she said.
She added that fund groups now have teams that assess the ESG credentials of investments to find pitfalls and “for some managers this is just another factor to consider when weighing up assets for their portfolio, while others will use it to mark clear red flags.”
While increased emphasis on ethics and social responsibility has pushed asset management groups to up their game, Suter said investors must be wary of the ‘greenwashing’ of funds. This is where “asset managers just attempt to capture some of the interest and inflows by bading a fund up as ethical.’’
“The onus is on investors and advisers to really dig into what the fund manager is doing to incorporate ESG into the portfolio selection, or whether they are just paying lip service to the idea,” she said.
Source CityWire