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Investing ethically – do passive funds work?

Environmental, social and governance (ESG) investing shows no sign of stopping as we venture into the new year. But is it possible to incorporate ESG when investing in passive funds?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Passive investing is one of the simpler ways to invest in the stock market. Passive, or tracker funds are convenient, low cost and simple to understand. They generally invest in all the same stocks as an index – a basket of shares or bonds like the FTSE 100 or the S&P 500. They’ve been around for over 40 years and are becoming more and more popular with investors.

Another growing theme in the investment industry is ESG. Managers of ESG integrated funds consider the Environmental, Social and Governance aspects of a business before investing, alongside all the usual analysis.

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. All investments and any income from them can fall as well as rise in value, so you could get back less than you invest.

Combining ESG and passive investing

The wide range of choice and a current lack of clear industry standards makes comparing and choosing ESG solutions difficult. Even the term ‘ESG’ is not universally understood, lacking a common definition across the industry. Different fund groups often have their own view on what it means to integrate ESG.

Active fund managers can usually drive more meaningful change among the companies they invest in. That’s because they can just sell a company’s shares if it doesn’t live up to the manager’s ESG-focused expectations. Passive funds can’t generally sell a company’s shares unless the company leaves the index. Passive funds do have some other tricks up their sleeves though.

So, what can passive funds do to tackle ESG factors?

What’s the best approach?

Investors’ experiences shape their opinion on how we should tackle change and the best way to overcome it. So, often there’s no right or wrong answer.

Although, when it comes to choosing a fund, we prefer those that integrate all of the approaches mentioned above. When combined, we believe they can have a much bigger impact on company behaviour for the greater good.

How do I find a fund?

When it comes to choosing a fund, there are thousands of options out there. Our Wealth Shortlist filters that universe down to funds we believe have the best potential for growth in the long term across the major sectors. From that list, we’ve picked out one passive option which integrates ESG into its methodology.

Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Legal & General Future World ESG Developed Index Fund

This fund’s objective is to provide global exposure to developed-market shares while integrating ESG by tracking the Solactive L&G Enhanced ESG Developed Index.

It incorporates Legal & General’s Climate Impact Pledge, an engagement process with companies they deem critical to meeting the aims of the Paris Agreement to limit climate change.

The index increases investments 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 invests less in companies that score poorly on these measures.

Legal & General has been running passive funds for over 30 years and it’s one of the largest UK providers in this space. That means it’s got the resources and expertise to track indices as closely as possible, and the scale to help keep charges to a minimum.

Annual percentage growth
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
Dec 19 -
Dec 20
Dec 20 -
Dec 21
Legal & General Future World ESG Developed Index N/A N/A N/A 14.94% 24.49%
Solactive L&G ESG Developed Markets Index N/A N/A 26.35% 14.70% 24.45%

Past performance is not a guide to the future. Source: Lipper IM, to 31/12/21. N/A – full year performance data is not available.

Find out more about Legal & General Future World ESG Developed Index fund, including charges

Legal & General Future World ESG Developed Index fund Key Investor Information

Want more information on sustainable investing?

If you want to learn more about sustainable investing, take a look at the new responsible investment section of our website. It’s got everything from tips and tricks to help you get started with investing responsibly to fund ideas.

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    Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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