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Ethical sector

Ethical sector

The term ‘ethical’ is often used as a catch-all term to describe any fund that is managed with social, environmental, or other ethical criteria in mind.

Dominic Rowles - Investment Analyst
29 May 2019

The term 'ethical' is often used as a catch-all to describe funds managed with social, environmental, or other responsible criteria in mind.

But there are lots of different ways you could profit from your principles. The main approaches are:

  • Ethical funds – These usually avoid companies that do harm to society like weapons manufacturers and tobacco companies. We call this negative screening.
  • Sustainable and impact funds – These funds invest in companies that have a positive effect on the world, which is known as positive screening. It could mean they make their products from recyclable materials, or they provide clean energy. Impact funds try to measure the positive impact their investments have on the world.
  • ESG integrated funds – Managers of ESG integrated funds consider environmental, social and governance factors as part of their wider research.
  • Passive funds – Ethical trackers follow the performance of an index but filter out certain industries, like oil & gas and munitions.
  • Shares – If you can’t find a fund that meets your ethical needs, you could consider investing in a selection of individual company shares.

If you want more information on any of the approaches mentioned above, please read our guide to ethical and sustainable investing

Our view on the Ethical sector

Ethical investing offers the possibility of making money whilst also benefiting society. And it’s becoming more and more popular with investors of all ages.

But ethics are personal. An industry that seems abhorrent to one person might seem like a necessary evil to others. Take pharmaceuticals. Some investors would avoid the industry because of moral objections to animal testing. Others suggest the work of pharmaceutical companies contributes to the development of society.

That’s why you’ll need to clarify each fund’s approach and make sure it’s consistent with your moral views before you invest. We look at the approaches taken by a selection of funds on the ‘fund reviews’ tab of this sector review. But you’ll find a more detailed description of each fund’s investment process in its prospectus.

Striking a balance between investing morally and delivering strong performance is no easy task. We don’t tend to find many fund managers who’ve overcome the constraints of a negatively screening ethical fund over the longer term.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

How an ethical fund performs depends on lots of factors, including the manager’s investment process.

Cutting out certain industries completely is one way to make sure your investment portfolio is aligned with your morals, but it will affect performance. For instance, if you invest in a fund without exposure to the oil & gas industry, it will do well compared to unrestricted funds when the industry is out of favour, but it won’t do so well if the industry recovers.

Sustainable and ESG funds normally give the manager freedom to invest in a broader range of areas. They can invest wherever they see the best opportunities and the extra diversification should mean the fund is less volatile over the longer term.

We look at how the various ethical investment approaches can affect performance in greater detail in our guide to investing ethically.

Read our guide

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our favourite funds in the sector

Below we review a selection of funds managed with ethical or socially responsible criteria in mind. They are provided for your interest but are not a guide to how you should invest. If you're unsure of the suitability of an investment for your circumstances seek personal advice.

Comments correct as at 30 April 2019. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future. There is a tiered charge to hold funds with HL. It's a maximum of 0.45% p.a. – view our charges.

Other funds in the sector

Here we look at some other funds of interest following our most recent sector review. Please note the review period may be over a short time period and past performance is not a guide to future returns.

Source for performance figures: Financial Express

A UK-focused fund with a focus on higher-risk small and medium-sized companies and sectors that are more sensitive to the economy. We consider it to have a 'negatively screened’ ethical approach. That means it won’t invest in areas like tobacco, arms and gambling.

The fund didn't perform as well as the broader UK stock market over the past year. The fund tends to avoid sectors like healthcare and oil & gas because of its ethical guidelines. But these areas were some of the strongest performers in the UK. Sectors like financials and industrials didn't do so well, which didn't help because quite a bit of the fund's invested here. There were some company-specific issues too including Vodafone, which faced concerns over increasing costs and falling customer loyalty. The company's shares were later sold.

Audrey Ryan’s long-term track record is better though. She’s been at the helm of this fund for two decades and we think she’s one of few managers to have handled the constraints of an ethical fund well over the long term.

This fund holds shares in Hargreaves Lansdown plc.

First State has a long and successful history investing in the Asia Pacific region. They see themselves as part owners of the businesses they invest in and look at how each one manages environmental, social and governance issues. We see this as an ESG integrated approach.

Martin Lau and his team have the freedom to invest across Asia, including higher-risk emerging markets. They look for companies with strong cash flows, an ability to keep costs under control and high standards of company management. The fund's done well over the past year, boosted by the manager's ability to invest in strong companies, regardless of what size they are, sector they're in or country they operate from.

We hold Martin Lau in high regard and his long-term track record is exceptional, although there’s no guarantee this will continue. We think it's a great way to access the growth potential of Asian stock markets and expect it to do well over the long run.

This fund invests in shares and bonds issued by UK companies of all sizes, including higher-risk smaller ones, with the aim to generate an attractive level of income. We consider it to have a negatively screened ethical approach.

Catherine Stanley combines her views on the economy and individual businesses to build a portfolio capable of generating income over the long run. She doesn’t invest in companies that make a lot of money from gambling, pornography, tobacco or weapons.

Our analysis suggests the fund’s focus on small and medium-sized companies has helped performance, but the fund is only slightly ahead of the broader UK stock market over the manager’s 10-year tenure.

Charlie Thomas looks for companies that offer solutions to environmental problems like pollution, resource scarcity and water shortages. We see this as a sustainable approach.

The fund doesn’t have many investments in miners, financials and the oil & gas sector as few companies in these industries help to solve environmental problems. That said, just because a company offers an environmental solution doesn’t necessarily make it a good investment. That’s why the manager also looks at other things like the quality of the management team, the company’s position in its market, its financial strength and whether its prospects are reflected in its share price.

The manager has a long track record, although the fund’s performance hasn’t kept pace with the performance of the broader global stock market over his tenure. Plus it tends to invest in quite a small area of the market. That means performance can differ significantly from global stock markets. We’re not currently considering this fund for a spot on the Wealth 50.

This fund invests in companies across the globe that address long-term demographic, environmental and resource challenges. They must also have strong prospects in their own right, and be available at an attractive price. It combines an impact and an ESG integrated approach.

The team behind this fund focus on nine sustainable investment themes, which range from resource efficiency and sustainable transport to education and wellbeing.

The fund hasn’t performed as well as the broader global stock market over the past few years. Our analysis suggests a focus on higher-risk small and medium-sized companies should have helped performance, but the managers invested in companies in this area of the market that haven't done so well. We’d like to see the managers build a long track record of adding value through their stock picking before considering the fund for the Wealth 50.

The managers have the flexibility to invest in emerging markets which are higher-risk than developed ones.

This fund invests in companies in the FTSE 350 Index that meet Ethical Investment Research Services (EIRIS) criteria.

Companies significantly involved in water pollution, intensive farming, gambling, adult entertainment, weapons manufacturing and tobacco sales are filtered out of the FTSE 350 index. The fund then aims to track the performance of the remaining companies.

Latest research updates

Kames Ethical Equity - profit from your principles?

Kames Ethical Equity - profit from your principles?

Mon 11 March 2019

Audrey Ryan is our favourite ethical fund manager. In this update, we look at where she's found opportunities and share our view on the fund's prospects.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

Fund research

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