Can I Invest Responsibly & Profitably? Best Performing Ethical Funds 2019

A couple of weeks ago Spencer Dale, BP’s chief economist, caused controversy by claiming that his company’s shares, and those of other major energy companies that derive a majority of their income from oil and gas, should be included in ‘ethical’ funds. Ethical funds, sustainable funds or ESG funds (environment, social, governance) as they are also known have different investment methodologies and criteria. But their underlying philosophy is that they only invest in assets that meet ethical and sustainability criteria.

Dale’s statement was based on the claim that BP’s oil and gas sales made a significant contribution to alleviating global poverty by raising living standards in the developing world. He also referenced the significant investments that BP and other big energy companies have and are making into renewable and ‘clean’ energy sources. The outcry he predictably provoked was based on BP’s questionable approach to minimising the environmental impact of its oil and gas drilling and extraction. As well as, of course, the polluting emissions that result from the burning of fossil fuels such as oil and gas.

Without addressing the opinions around the rights and wrongs of both positions directly, the majority of ESG funds do not invest in big oil companies. More did in the past on reasoning similar to Dale’s. But investor backlash has shifted policy in recent years and now it would be rare to find a fund marketed as ESG, responsible, sustainable or ethical investing in big oil. Likewise, ESG funds would avoid companies with a record of poor working conditions for employees, a poor record of protecting the rights of users and clients, major polluters, prosecuted tax dodgers, tobacco and alcohol companies and more.

Different funds have different criteria for their investment methodology and interpretation of what qualifies as an ESG asset. It is down to individual investors to look into that, read the fine print, assess their current and past holdings and come to a personal decision on whether a fund’s investment approach matches their own outlook.

ESG Funds Growing in Popularity and Influence

Research conducted in October of last year (2018) by fund house Schroders indicated that 56% of the UK investors polled said they had increased their investment portfolio allocation to ESG funds over the past five years. In the USA, a country with a well-publicised societal split over the scientific consensus for global warming’s link to fossil fuel emissions and other sources of greenhouse gases, assets under the management of ESG funds had hit $13 trillion by last October. Those figures come from the US SIF Foundation’s biennial Report on US Sustainable, Responsible and Impact Investing Trends and represent 38% over the two years from 2016.

In the UK, a 2017 Worthstone paper on the local ‘retail impact investing universe’ totalled £87bn assets under ESG management and spread between a market offering that has grown to 194 funds. Forbes puts the international total at $20 trillion, or around a quarter of all of the professionally managed investments in the world.

And the influence of ESG investors is growing too. Data provider Proxy Insight says the number of environmentally motivated investor resolutions has more than doubled since 2013/14. Funds are now using their voting voice to push the interests of their investors. There is also a purely financial element to their growing motivation to do so.

Regulatory changes or fines are a significant business, and by extension investment, risk. Governments and regulators are getting stricter with companies that exploit loopholes and or bend rules around social responsibility, health, taxes, harvesting of personal data, employee rights and pollution. Fines meted out to perpetrators are rising and laws and regulations changing. Avoiding companies that skate on thin ice over these issues or have historically shown little regard for them significantly de-risks an investment portfolio.

Facebook are currently said to be in negotiations with the U.S. Federal Trade Commission over a settlement for alleged privacy violations that could mean a multi-billion dollar payout. BP have paid out a pre-tax $61.6 billion in fines and settlements over the 201 Deepwater Horizon oil spill in the Gulf of Mexico. British banks have paid out almost £35 billion in PPI compensation since 2011 as a result of the mis-selling scandal.

While these financial penalties for unethical behaviour, past and possibly future, have or will not break the companies involved, they have certainly proven costly enough to make a painful impact in their bottom lines. This has an impact on share price and, therefore, investor returns that investing in an ESG fund protects against.

Longer term there are even greater worries. In our article of January 31^st, we detailed the financial impact climate change is now forecast to have on the global economy:

“A 2015 report researched by The Economist’s Intelligence Unit estimated climate change-based financial losses could range at between a best case scenario $4.2 trillion and worst case $43 trillion by the end of this century. For pension funds that need to look decades ahead, that’s a scary prospect”.

Does Investing Sustainably Compromise Returns?

The, potentially literally if you’re a big investor, million-dollar question is if choosing to invest sustainably compromises returns over the long term? It’s of course easy to be principled until it hits the wallet or bank account. The good news is that the evidence suggests investing for returns and investing in a sustainable economy doesn’t have to be any kind of trade-off at all and the two are perfectly mutually compatible. In fact, there is growing evidence that investing sustainably now delivers better returns than not.

A recent blog on ethical investing published on the Boring Money portal references research conducted by Hermes Investment Management. The company screens publically listed companies for ‘corporate oversight’ or an ethical approach to how they do business and found those that pass their criteria outperform peers that do not. And not by a little. Since 2009, ethically-run companies outperformed by 3.6% a year. Hermes’ findings remained consistent across sectors and geographies.

Morningstar, the fund research company has also added a sustainability screener to its set of fund analysis tools. The ESG ratings criteria are not based on whether or not a fund markets itself as ESG but its holdings. Boring Money used the screener to compare the top 10 performing funds with high ESG ratings to a FTSE 100 benchmark index tracker and a top-performing fund with a lower ESG rating.

Source: Boring Money.co.uk

The Fundsmith Equity fund, the top performer with a lower ESG rating, is one of the best performing funds in its class. Over three years it was the best performer of the sample group but only slightly ahead of the combarable funds with a strong ESG rating over the shorter term. All of the funds were significantly ahead of the FTSE 100 benchmark tracker. Longer term, as environmental and other regulations around ethics tighten, it can be expected the gap will narrow. But even today, the data shows funds with an admirable ESG rating perform well when compared to the average fund from the same class that doesn’t concern itself with ESG and are a very viable investment.

Which Are The Best Performing Ethical (ESG) or Sustainable Funds For 2019?

A good starting point when considering which are the best ESG funds to opt for is the Boring Money/Morningstar list of 10 included in the chart above:

• Schroder European Alpha Income Fund
• Premier Ethical Fund
• Schroder European Alpha Plus Fund
• LF Lindsell Train UK Equity Fund
• Janus Henderson Global Sustainable Equity Fund
• VT Strategic Value Fund
• F&C European Growth and Income Fund
• MI Somerset Emerging Markets Fund
• Royal London UK Mid-Cap Growth Institutional Fund
• Franklin UK Mid Cap Fund

The Love Money portal also has a list of its best picks for ESG funds. The 8 selected are all specifically marketed as ESG investments so there is perhaps a greater security in future holdings not compromising that status as may be the case with another fund that has a high ESG rating from Morningstar. The Love Money eight are:

Kames Ethical Equity: Ongoing charge: 0.78%, performance over one year: +6.37%, performance over five years: +47.90%.

Stewart Investors Asia Pacific Leaders: Ongoing charge: 0.89%, performance over one year: +14.53%, performance over five years:  +73.92%.

Jupiter Ecology Fund: Ongoing charge: 0.78%, performance over one year: +0.1%, performance over five years: +55.1%.

WHEB Sustainability Fund: Ongoing charge: 1.68%, performance over one year: +12.08%, performance over five years: +84.57%.

Legal & General Future World Gender in Leadership UK Index Fund (GIRL Fund): Ongoing charge: 0.50%, performance N/A as fund launched May 2018.

Vanguard SRI Global Stock Fund: Ongoing charge: 0.35%, performance over one year: +14.51%, performance over five years: +86.74%.

Kames Ethical Cautious Managed: Ongoing charge: 0.79%, performance over one year: +2.68%, performance over five years: +32.71%.

Stewart Investors Worldwide Sustainability fund: Ongoing charge: 1.66%, performance over one year: +8.76%, performance over five years: +73.63%.

While all of the ESG funds listed here have demonstrated strong performance it is of course, as always, vital to keep in mind as an investor that future returns may not be reflective of past performance. You should always do your own research on a fund and its holdings and make a judgement on its potential going forward. However, the returns delivered by each of these funds over several years are far better than the average in their class of managed funds, ESG and non-ESG, and demonstrate that investing sustainably certainly does not need to imply compromising on returns.