The term 'responsible investment' is often used as a catch-all to describe funds managed with social, environmental, or other responsible criteria in mind.
There are more options than ever for investors who care about how their investments impact the environment and society. We look at the main ones below. But remember, the following categories aren't mutually exclusive, meaning several could apply to a particular fund.
- Stewardship – Fund managers practicing good stewardship normally see themselves as part-owners of the businesses they invest in and want to make sure they’re run in a way that benefits all shareholders. They vote at AGMs and engage with company managers to hold them to account, using their bargaining power to push positive change.
- ESG integration – When analysing a company, a manager of an ESG integrated fund considers environmental, social and governance issues as part of their wider research. Managers of ESG funds think ESG factors play an important part in the long-term performance of a company.
- Exclusions – Funds that avoid companies that do harm to society like weapons manufacturers and tobacco companies. Exclusions-based funds are also known as negative screening and ethical funds.
- Sustainability focus – These funds try to make money by investing in companies that are more sustainable than their competitors or that are likely to benefit from the growing need for more sustainable goods and services.
- Impact investing – These funds measure and report back on the positive impact they set out to make on the environment and society.
If you want more information on any of the approaches mentioned above, please read our guide to responsible investing.
Our view on the Responsible Investment sector
Responsible investing offers the possibility of making money in a way that's in line with your views and beliefs. And it’s becoming more and more popular.
But 'responsible' means different things to different people. 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 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.
How a responsible investment fund performs depends on lots of factors, including the manager’s investment process.
Cutting out certain industries completely could be 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.
Stewardship-based funds and ESG integrated 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 responsible investment approaches can affect performance in greater detail in our guide to responsible investing.
The fund reviews below are provided for your interest but are not a guide to how you should invest. For more information, please refer to the Key Investor Information for the specific fund. Remember all investments can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.
There is a tiered charge to hold funds on the HL platform. It is a maximum of 0.45% a year - view our charges. Comments are correct as at at 31 January 2022.
Wealth Shortlist fund reviews
Other funds in the sector
A UK-focused fund with a focus on higher-risk small and medium-sized companies. It combines 'stewardship', ‘ESG integration' and 'exclusions'. It doesn’t invest in areas like tobacco, arms and gambling.
The fund's investment universe is filtered for 'sin stocks' by Aegon's ESG Research Team. This negative screening process is kept separate from manager Audrey Ryan and the rest of her team, leaving them free to focus on stock selection and portfolio construction. ESG is also key to the fund's investment process. Ryan and her team aim to identify and understand the main environmental, social and governance risks of each company, industry and sector they invest in. They believe companies that lead the way in governance and sustainability could outperform over the long run.
Audrey Ryan has a good long-term track record. She’s been at the helm of this fund for more than two decades and we think she’s one of few managers to have handled the constraints of an 'exclusions-based' ethical fund well over the long term, although past performance is not a guide to the future.
This fund holds shares in Hargreaves Lansdown plc.
The fund aims to dampen volatility by providing some shelter during market wobbles, while also delivering some long-term growth in a sustainable way. It combines 'stewardship', 'ESG integration' and 'exclusions'.
This fund launched in April 2018 and is managed by BNY Mellon's Real Return team. They invest in a variety of assets, such as shares, bonds, commodities and cash, and adjust their exposure to each depending on their economic outlook. They also have the flexibility to invest in emerging markets, high-yield bonds and derivatives which, if used, adds risk.
The fund’s sustainable ‘red lines’ mean companies that violate the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anticorruption) and those incompatible with the aim of limiting global warming to 2°C are not considered. It also won’t invest in any company that makes more than 10% of its revenues from tobacco, gambling, weapons and a number of other controversial areas.
The team’s built up a good track record over a long period of time with another fund that’s managed similarly to this one, albeit with less emphasis on sustainability. Their experience and time-tested investment process give us confidence they can deliver good returns in a responsible way with this fund, although there are no guarantees. The fund will perform differently to the team’s other ventures.
Long-term growth is the main aim of this fund, and the managers try to achieve more stable returns compared with others in the Asia sector. This fund combines a 'stewardship' and 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 team’s investment philosophy is founded on stewardship. When they make an investment, they see themselves as part owners of the business. So they engage with companies to make sure they are run in a way that’ll benefit all shareholders, and also consider environmental, labour and other governance issues.
We think this fund is a great way to access the growth potential of Asian stock markets and it could do well over the long run. We hold Martin Lau in high regard and his long-term track record is exceptional, although there’s no guarantee this will continue.
This fund aims to provide a good level of income alongside capital growth over the long term. It combines ‘stewardship’, ‘ESG integration’ and ‘exclusions’. It mainly invests in the UK, but the manager also uses his flexibility to invest up to 20% overseas.
Andrew Jones has been at the helm of this fund since January 2012 and has over two decades of experience managing UK equity income funds. The fund doesn’t invest in areas that have a significant negative impact on people (alcohol, armaments, gambling, pornography and tobacco), the environment (fossil fuel extraction & refining, fossil fuel power generation, chemicals of concern, contentious industries and nuclear power) or animals (non-medical animal testing, fur and genetic engineering).
All investments must also be compliant with the UN Global Compact Principles (a United Nations pact on human rights, labour, the environment and anti-corruption), and before adding any company to the fund, the manager carries out detailed ESG analysis, engaging with company managers if he feels there’s room for improvement.
Please note the manager has the flexibility to invest in smaller companies, which adds risk. The fund also takes charges from capital, which could boost the income, but reduces the potential for capital growth.
This fund aims to track the performance of the Solactive L&G ESG Developed Markets Index. It combines 'stewardship', 'ESG integration' and 'exclusions'.
The Solactive L&G ESG Developed Markets Index is made up of over 1,400 companies based across the globe, focused towards sectors such as technology, pharmaceuticals and financials. The index increases the weighting in companies that score well on a variety of ESG criteria – from the level of carbon emissions generated, to the number of women on the board and the quality of disclosure on executive pay. It also reduces the allocation to companies that score poorly on these measures.
The fund also employs some negative screens. It won’t invest in tobacco companies, pure coal producers, makers of controversial weapons (such as cluster munitions, anti-personnel mines and chemical and biological weapons) or persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption).
The fund’s tracked its index well since launch in April 2019, although this is only over a relatively short period of time. Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees.
The managers have the flexibility to invest in derivatives which, if used, adds risk.
This fund focuses specifically on the Indian Subcontinent, with the aim to provide long-term investment growth. It mainly invests in Indian companies, though it can also invest in Pakistan, Sri Lanka and Bangladesh. It combines 'stewardship', 'ESG integration' and 'sustainability focus'.
Sashi Reddy and David Gait invest in quality companies they believe can deliver sustainable and predictable growth over the long term. They like cash-generative businesses, which are in good financial health and could withstand periods of economic volatility. Stewardship and sustainability are a core part of the investment strategy. The duo focus on companies they believe could benefit from and contribute to the sustainable development of the countries they’re based in.
The managers’ longer-term record on this fund is impressive, and it’s significantly outperformed the broader Indian stock market over the long term. Our analysis shows Reddy and Gait have added value through good stock-picking, regardless of the size of the company or what sector it’s in. As always, past performance isn’t a guide to future returns.
Investing in emerging markets is higher-risk, and we think this fund should make up just a small portion of a well-diversified portfolio. The fund also invests in smaller companies, which increases risk further.
This fund aims to provide a rising income alongside capital growth over the long term – a ‘total return’ approach. The manager also incorporates ‘stewardship’, ‘ESG integration’ and ‘exclusions’. He focuses on the UK stock market but has flexibility to invest up to 30% overseas.
Hugo Ure has managed the Troy Trojan Ethical Income fund since launch in January 2016. Ure has a shorter analysable track record than some other fund managers on the Wealth Shortlist, but we’re encouraged that the Trojan Ethical Income fund uses the same investment process as the Troy Trojan Income fund. Both funds also leverage the skills and experience of the wider Equity Income team.
The manager won’t invest in companies deemed unethical, such as those with significant involvement in armaments, tobacco, pornography, fossil fuels, alcohol, gambling and high interest lending. He also conducts ESG analysis on each company to achieve a deeper understanding of the risks. Where he feels improvements can be made, he’ll engage with the company. The focus is on large and medium-sized companies, although the manager does have the flexibility to invest in higher-risk smaller companies too.
Since launch in 2016, the fund’s risen strongly, but it’s slightly lagged the broader UK stock market. This is in line with what we’d expect though, given the team’s approach. Their relatively defensive style means the fund has tended to hold up well when stock markets fall sharply but lag a rapidly rising market. Stock markets have generally performed strongly since the fund’s launch, so it hasn’t quite kept pace.
The manager’s also done a good job of growing the fund’s income over time, although like most other equity income funds, it was forced to reduce income payments in 2020 as companies across the country slashed their dividends in response to the COVID-19 pandemic. Investors should note that the fund’s exclusions, and the manager’s relatively defensive investment philosophy, mean we expect the fund to pay a lower yield than some other income funds. The fund takes charges from capital, which can increase the income on offer but reduces the potential for capital growth. Income yields are variable and not a reliable indicator of future income.
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 'stewardship', 'ESG integration' and 'impact'.
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, and the fund’s sector positioning, should have helped performance, but the managers invested in companies in these areas of the market that haven't done so well.
The managers have the flexibility to invest in emerging markets which are higher-risk than developed ones.
This is an investment-grade corporate bond fund combining 'stewardship', 'ESG integration', ‘exclusions’ and 'sustainability focus'. The fund won’t invest in ‘sin stocks’ and the screening process also identifies companies with the opportunity to make a positive impact.
The main attraction of this fund is that it’s managed by the experienced Eric Holt and his team. They look for opportunities off the beaten track, in areas under-researched by other investors. This gives them access to opportunities most others ignore. They won't invest in bonds issued by companies that make more than 10% of their revenues from alcohol, armaments, gambling, tobacco or pornography. They also avoid companies without adequate systems and processes to protect the environment and prevent human rights abuses.
The manager has built a strong long-term track record on this fund, and we think he has the potential to continue delivering good returns in future, although there are no guarantees.
Please note the fund can invest in high yield bonds, which are higher risk.
This fund invests in companies able to benefit from, and contribute to, the sustainable development of the countries they operate in. It combines 'stewardship' with 'ESG integration' and a ‘sustainability focus’.
This fund is managed by Jack Nelson. He’s got the backing of an experienced team which we hold in very high regard. They look for high quality companies with good growth prospects and strong management teams. They also consider the way companies manage their environmental and social impacts, engaging with companies if they feel there are improvements to be made.
The team's focus on high quality companies means we'd typically expect the fund to underperform when markets rise quickly, but also lose less money than broader emerging markets when they fall, although there are no guarantees.
Investors should note that emerging markets are higher-risk than their more developed peers.
The fund invests globally in companies that have a positive emphasis on society, the environment and health. It combines 'stewardship' with 'ESG integration' and a ‘sustainability focus’.
Nick Edgerton’s sustainable approach means he’s unlikely to invest in certain companies like tobacco, alcohol, and weapons, but they are not specifically excluded. Investors should note the fund has some exposure to emerging markets and is a concentrated portfolio. Both of these factors increase risk.
The manager benefits from the support of a team we have long held in high regard. We therefore believe the fund could deliver reasonable returns over the long term, although there are no guarantees.
This fund aims to deliver a combination of income and capital growth over the long term by investing mostly in sterling-denominated, investment grade corporate bonds. It combines ‘stewardship’, ‘ESG integration’, ‘exclusions’ and a ‘sustainability focus’.
The fund’s managed by a team of four: Stuart Steven, Kenny Watson, Aitken Ross and Jack Willis. They aim to identify bonds issued by high-quality companies whose core products or services make a positive contribution to society or the environment. The fund also employs negative screening. This means it won’t invest in any company that makes more than 5% of its revenues from alcohol, animal testing services, coal, oil & gas, gambling, intensive meat and fish farming, nuclear, ozone depleting substances, pornography, tobacco or weapons systems.
The team began managing the fund in August 2012 and since then it’s risen strongly, outperforming peers in the IA £ Corporate Bond sector. Our analysis suggests returns were boosted by the managers’ ability to invest in bonds issued by companies with strong prospects. Remember, past performance is not a guide to the future.
The managers have the flexibility to invest in derivatives and emerging markets which, if used, adds risk.
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