Responsible Investing – two fund ideas to get started

There are lots of ways to invest responsibly. You could avoid investing in the areas that do the most harm like tobacco and weapons makers, or invest in those that make a positive difference, like renewable energy and healthcare providers. Or you could invest in companies that look to prioritise environmental, social and governance (ESG) issues.

ESG-focused investing is more popular than ever and it’s easy to see why.

ESG issues, like the way companies treat their workers, or how they limit greenhouse gas emissions, are increasingly being recognised as genuine risks to the long-term success of a business. If they’re not handled properly they can cause reputational damage, impact profits and drag down a company’s share price.

This matters today more than ever. In a world dominated by social media, a company's misdeeds appear on the news feeds of millions in a matter of hours, potentially sparking outrage, backlash and boycott.

The Covid-19 pandemic has only accelerated the trend towards ESG-focused investing. It highlighted the part that companies play in society and how they interact with the environment around them. At the same time, corporate governance processes have been severely tested.

With the new tax year upon us, lots of investors are looking for investment ideas for their Stocks and Shares ISAs and SIPPs (Self Invested Personal Pensions). We think the start of the new tax year is as good a time as any to consider dipping a toe into the world of responsible investment.

Investing in these 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.

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

A tracker option

We think the Legal & General Future World ESG Developed Index is a good option for broad exposure to global stock markets, while being mindful of ESG issues.

It could act as the backbone for a more developed responsible investment portfolio or as a first responsible investment. Investors should know though that the managers' flexibility to invest in derivatives adds risk.

It invests in over 1300 companies across the globe and aims to track the Solactive L&G ESG Developed Markets Index. 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 reduces how much it has invested in companies that score poorly on these measures.

Legal & General has made a commitment to encourage good ESG practices among the companies they invest in. Every year they engage with hundreds of companies to encourage them to improve the way they do business.

The fund won't invest in tobacco companies, pure coal producers or makers of controversial weapons (like cluster munitions, anti-personnel mines and chemical and biological weapons). It also won’t invest in persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption).

Since launch in April 2019, the fund's tracked its index well, although this is a relatively short period of time and past performance isn't a guide to the future.

*Performance figures prior to launch in April 2019 are unavailable.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2021.

An active option

An alternative option could be to start a responsible investment journey with a fund that invests on home soil. Aegon Ethical Equity does just that.

Manager Audrey Ryan aims to identify and understand the key environmental, social and governance risks of each company, industry and sector that she invests in. She believes companies that lead the way in governance and sustainability tend to outperform over the long run.

The fund uses a strict exclusions-based approach. It won’t invest in companies involved in activities deemed unethical, from tobacco and alcohol producers, to munitions manufacturers and companies that use animal testing.

Around two thirds of the UK’s largest companies are excluded from the fund's investment universe for ethical reasons. This means there’s a focus on higher-risk small and medium-sized companies. Our analysis suggests this has helped the fund deliver stronger performance than the broader UK stock market over the long term, although it can increase volatility. Past performance is not a guide to the future.

We think Ryan is a dedicated, passionate fund manager and her fund has the potential to deliver good returns for ethical investors over the long run, although there are no guarantees.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2021.

Aegon Ethical Equity currently holds shares in Hargreaves Lansdown plc.

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