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Responsible Investment

Responsible Investment

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

Dominic Rowles - Investment Analyst
24 January 2020

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 where their money is going. 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 – Funds that invest to deliver a good return alongside sustainable benefits for the economy, the environment and society. Fund managers practicing good stewardship vote at AGMs and engage with company managers to hold them to account.
  • ESG integration – Managers of ESG integrated funds systematically consider environmental, social and governance factors as part of their wider risk management processes.
  • Exclusions – Funds that avoid companies that do harm to society like weapons manufacturers and tobacco companies. This is also called negative screening.
  • 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.
  • Passive funds – Responsible trackers often follow the performance of a bespoke index that filters out certain industries, like oil & gas and munitions.
  • Shares – If you can’t find a fund that meets your 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 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.

Striking a balance between responsible investing and delivering strong performance is no easy task – particularly if managers count out certain sectors. We don’t tend to find many fund managers who’ve overcome the constraints of an exclusions-based 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.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term potential

SEE THE WEALTH SHORTLIST

How a responsible investment 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.

ESG integrated funds and those with a sustainable focus 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.

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.

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 31 December 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.

Our Wealth Shortlist features a range of funds from this sector, selected by our analysts for their long-term potential. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% a year - view our charges.

Wealth Shortlist fund reviews

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 think it combines 'stewardship', ‘ESG integration' and 'exclusions'. It doesn’t invest in areas like tobacco, arms and gambling.

The fund beat the performance of the broader UK stock market over the past year. It was boosted by a focus on technology companies, which performed well on the whole. Conversely, the fund doesn’t invest much in the oil & gas sector because of its ethical guidelines. They were some of the weakest performers over the past year, so a lack of exposure helped performance.

Audrey Ryan’s has a good long-term track record. 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 'exclusions-based' 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 think 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 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 think it will 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. It combines 'stewardship' with 'ESG integration' and 'exclusions'.

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.

Please note this fund takes its charges from capital which can increase the yield but reduce the potential for capital growth.

Charlie Thomas looks for companies that offer solutions to environmental problems like pollution, resource scarcity and water shortages. We think his fund combines 'stewardship', 'ESG integration' and 'sustainability focus'.

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 its benchmark 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.

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 should have helped performance, but the managers invested in companies in this area 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 fund invests in companies in the FTSE 350 Index that meet Ethical Investment Research Services (EIRIS) criteria. It uses an 'exclusions-based' approach.

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.

David Osfield and his team invest in companies that make a positive contribution to society and the environment. They also won't invest in companies that make more than 10% of their money from industries like alcohol, tobacco and weapon production. It combines 'stewardship' and 'ESG integration' with 'exclusions' and 'sustainability focus'.

David Osfield and his team invest in well managed companies with strong financials and attractive valuations that have not yet been recognised as sustainable leaders. Recent investments include US-based medical device maker Zimmer Biomet. The manager thinks the company is showing signs of improvement following a long period of poor performance.

His more contrarian investment style has been out of favour in recent years. This, combined with a lack of investments in the strongly-performing US stock market, held back performance over the period.

Investors should note that the fund's investments in emerging markets add risk.

This fund invests globally in companies of all sizes, including higher risk smaller companies. The emphasis is on companies that have a positive impact 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’s track record is short, but he benefits from the support of a team we have long held in high regard. The fund didn’t do as well as the broader global stock market over the past year but we still think the team will do a good job for long-term investors, although there are no guarantees.

This is an investment-grade corporate bond fund combining 'stewardship', 'ESG integration' and 'sustainability focus'. The manager looks for companies that try to make a positive impact on society, as well as excluding those in industries such as alcohol, gambling and pornography.

The main attraction of this fund is that it is managed by the experienced Eric Holt and his team. They look for opportunities off the beaten track, in areas under-researched by other investors. The fund is currently focused towards bonds issued by financial companies and those that give the bondholder a claim on the company’s assets if it can’t repay its debts.

The fund underperformed its peers in the IA Sterling Corporate Bond sector over the past year but we retain confidence in the manager to deliver strong returns over the long run.

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’.

We've held the team at Stewart in high regard for a number of years. They look for high quality companies with good growth prospects and strong management teams. This 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.

The managers have found lots of opportunities amongst consumer-related companies. Recent investments include household appliance maker Hangzhou Robam. The company is a large player in its industry, governance is improving and the company has a good record of putting investors' interests first, according to the managers.

Investors should note that the fund's investments in emerging markets add risk.

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