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 – 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. 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.
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.
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 31 October 2020.
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. This fund was previously named Kames Ethical Equity.
The fund's investment universe is filtered for 'sin stocks' by Aegon's ESG Research Team. The 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 tend to outperform over the long run.
Audrey Ryan 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, 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, which we hold in high regard. They invest in a variety of assets, such as shares, bonds, commodities and cash, and adjust their exposure to each depending on their view of the 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.
The team’s built up a good track record over a long period of time with the BNY Mellon Real Return Fund, which has featured on the Wealth Shortlist (and formerly the Wealth 50 and 150) since December 2010. It's managed in a similar way to the Sustainable Real Return Fund, but with less emphasis on sustainability.
The team’s 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 previous ventures.
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 around 1,300 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 a 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.
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 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 has the ability to do well over the long run.
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.
Charlie Thomas looks for companies that offer solutions to environmental problems like pollution, resource scarcity and water shortages. This 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 globally in companies of all sizes, including higher risk smaller ones. 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 relatively short, but he benefits from the support of a team we have long held in high regard. We therefore believe the fund will deliver reasonable returns over the long term, 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, and won't invest in 'sin stocks'.
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. 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 relatively new to fund management but 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.
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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.
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