Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice. You should seek advice if you’re not sure an investment is right for you.
The case for investing is simple. To grow your money over time.
But investing can be about so much more than just trying to make money. Investing responsibly allows you to use your investments to benefit society, as well as yourself. And there are lots of ways to go about it. ESG is just one of these – it allows you to invest while taking account of Environmental, Social and Governance risks, as well as the usual financial considerations.
We explain the main approaches to Responsible Investment below. Remember they’re not mutually exclusive, so several could apply to a particular fund.
Fund managers focused on stewardship engage with the companies they invest in to make sure their voices are heard on issues that are important to investors.
They might use their bargaining power to push positive change, like cost-cutting measures, or changes to a company’s senior management. They might also lobby companies on environmental, social and governance issues, from encouraging them to reduce waste to making sure they treat their suppliers, customers and employees fairly.
ESG Integrated funds
Managers of ESG integrated funds consider environmental, social and governance factors as part of their wider research. Their main goal is to invest in companies with the strongest prospects, but they think ESG factors play an important part in the long-term performance of a company.
Taking ESG factors into account can help avoid potential issues. For example, a mining company might be less likely to face bad press if they have robust environmental and safety policies in place.
Exclusions-based funds, also known as 'ethical' or 'negatively-screened' funds, won’t invest in companies, industries or countries that don’t meet their moral criteria. Companies that damage the environment, like those in the mining and oil & gas industries, are often excluded, as are weapons manufacturers, and tobacco companies. The exact restrictions will vary from fund to fund though.
Sustainability-focus and impact investing
Sustainability-focused 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 funds go one step further. They measure and report back on the positive impact they set out to make on the environment and society. They might invest in companies that save a quantifiable amount of water, or avoid producing a certain amount of carbon dioxide.
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. 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. 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.
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 other 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 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 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 could 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.
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 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 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 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.
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 (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.
The fund’s performed well over the long term. Our analysis suggests Jones’ ability to select companies with outstanding prospects, regardless of their size or the sector they’re in, boosted returns, although past performance is no guide to the future. The manager’s done a good job of growing the income over time too, particularly given the additional challenge of managing an exclusions-based fund.
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 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 reduce the potential for capital growth.
Please note, this fund invests in Hargreaves Lansdown plc. It can also invest i