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Responsible Investment sector review – could investor demand keep rising?

In this review of the Responsible Investment sector, we look at ideas to invest sustainably, latest analysis from our research team and how our Wealth Shortlist picks have performed.

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.

Dominic Rowles
Investment Analyst

Published on 27 August 2021

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The Responsible Investment space is growing rapidly. More and more investors want to invest in a way that matches their morals, and dozens of new funds are being launched to cater for the demand. In June alone, Responsible Investment funds attracted £1.2bn – that’s over a quarter of all the money invested in funds during the month.

We don’t see this trend ending anytime soon. Investing responsibly could be more important than ever.

Governments and companies alike are searching for ways to reduce carbon emissions and have less negative impact on the environment and society. Those left behind could face a media backlash, regulatory issues or even a customer boycott. Ultimately this could impact their prospects, and their share prices.

There’s a demographic tailwind too. Millennials (those born between 1981 and 1996) are more interested in sustainability than any generation before them. As their wealth increases over time, they have the potential to reward sustainable companies while punishing those that fall short of what's expected.

Guide to responsible investment

The latest sustainability news that could impact investors

The Intergovernmental Panel on Climate Change recently published its sixth annual assessment report, which captured headlines across the globe. It stated with more certainty than ever before that the climate is changing, human activity is responsible, and the consequences of those changes will be dramatic.

The report confirms that a temperature rise of 1.5°C above pre-industrial levels is inevitable by the 2030s. If no action is taken to cut emissions over the coming decades, temperatures could rise by as much as 4°C. The difference between 1.5°C and 4°C might not sound like a lot, but the impact would be significant.

If temperatures rise 4°C, droughts could become 5.1 times more frequent, and extreme rainfall could occur 2.8 times more often. If that happens, many parts of the world would become uninhabitable, causing mass migration and huge economic cost.

The scale of the challenge is immense. If we want to limit global warming to 1.5°C by 2050, global emissions need to fall 7.6% every year this decade. Putting that figure in context, the worldwide lockdowns caused by the Covid-19 pandemic are thought to have seen emissions drop around 8% in 2020.

In November, global leaders will convene in Glasgow for the UN Climate Change Conference 2021 (also known as COP 26). As many countries look to rebuild their economies in the wake of the pandemic, there has been a major emphasis on ‘building back better’ through a green recovery.

COP 26 is also being seen as a successor to COP 21, where the Paris Agreement, which aimed to keep global emissions ‘well below 2°C’, was signed. COP 26 is expected as an opportunity to review what has been achieved since the Paris Agreement and lay out more plans to reach the target.

This article isn't personal advice. If you're not sure if an investment is right for you, ask for financial advice.

What has our research team been up to?

We’ve held video calls with the managers of several responsible investment funds in recent months, including Stuart Steven and Jack Willis, co-managers of the Liontrust SF Corporate Bond fund. The team behind this fund analyse what’s happening in the economy. This helps shape the way they build the portfolio, and how much risk they’re prepared to take. When deciding which bonds to invest in, they combine traditional credit analysis with a detailed sustainability assessment. The fund also avoids companies with significant involvement in areas like tobacco, gambling, nuclear energy, intensive farming and weapon systems.

The managers don’t expect inflation to return to the low levels we became used to before the pandemic. The fund’s sensitivity to interest rate rises (duration) has therefore been kept relatively low. Sector-wise, they’re currently finding plenty of opportunities amongst insurance, banks and telecoms, and the fund’s focused towards these areas.

Find out more about Liontrust SF Corporate Bond, including charges

Liontrust SF Corporate Bond Key Investor Information

We also caught up with Hamish Chamberlayne, manager of the Janus Henderson Global Responsible Managed fund. Each of his investments have the potential to benefit from one of ten sustainable trends, ranging from clean energy and water management to health and quality of life. The fund also won’t invest in companies that contribute to environmental and social harm.

Current investments include Autodesk, a global leader in design software used by architects and engineers worldwide. The company provides products and services that make sustainable design easy and cost-effective, while also reducing waste. It also has low levels of debt and the ability to increase prices without significantly impacting demand for its service.

Find out more about Janus Henderson Global Responsible Managed, including charges

Janus Henderson Global Responsible Managed Key Investor Information

How have our Wealth Shortlist funds performed?

There are currently five funds in the Responsible Investment sector of the Wealth Shortlist, and several other responsible funds that sit in other sectors. We continue to carry out analysis to find new ideas in this area.

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.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below. Remember past performance is not a guide to the future. Investments and any income they produce can fall as well as rise in value, so you could get back less than you put in.

Looking across all sectors, Stewart Investors Indian Subcontinent Sustainability was the best-performing Responsible Investment fund on the Wealth Shortlist over the past year. It rose 48.5%*, compared with 38.2% for the broader Indian stock market, although past performance isn’t a guide to the future.

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 change in the economy. 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 fund features investment in emerging markets and smaller companies which increases risk.

Find out more about Stewart Investors Indian Subcontinent Sustainability, including charges

Stewart Investors Indian Subcontinent Sustainability Key Investor Information

Aegon Ethical Equity also delivered a strong return, rising 31.7% and outperforming the broader UK stock market by 5.1%. The fund invests in UK companies, including higher risk smaller companies, using an exclusions-based approach, so won’t invest in areas like tobacco, alcohol, munitions manufacturers and companies that use animal testing.

Please note the fund also has a holding in Hargreaves Lansdown PLC.

Find out more about Aegon Ethical Equity, including charges

Aegon Ethical Equity Key Investor Information

BNY Mellon Sustainable Real Return delivered the lowest return, although it still rose 10.6%, beating both its LIBOR+4% benchmark and its peers in the IA Targeted Absolute Return sector. It’s a more conservative fund and invests in shares, bonds, commodities and cash with the aim to reduce the ups and downs that come with investing just in shares. We wouldn’t expect it to outperform pure equity funds when markets rise strongly, but it could offer some shelter when stock markets turn negative.

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 anti-corruption) and those incompatible with the aim of limiting global warming to 2°C are not considered for the fund. It also won't invest in any company that makes more than 10% of its revenues from tobacco.

The fund can invest in emerging markets, high yield bonds and use derivatives which increases risk.

Find out more about BNY Mellon Sustainable Real Return, including charges

BNY Mellon Sustainable Real Return Key Investor Information

	July 2016 - July 2017	July 2017 - July 2018	July 2018 - July 2019	July 2019 - July 2020	July 2020 - July 2021
Stewart Investors Indian Subcontinent Sustainability	15.8	9.1	2.0	-11.8	48.5
FTSE India	24.2	5.6	0.9	-8.6	38.2
Aegon Ethical Equity	10.6	7.0	-3.8	-3.4	31.7
FTSE All-Share	14.9	9.2	1.3	-17.8	26.6
BNY Mellon Sustainable Real Return	n/a	n/a	9.2	5.4	10.6
LIBOR 4%	4.3	4.5	4.7	4.5	4.0
IA Targeted Absolute Return	3.6	0.8	0.9	-0.8	7.6

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2021. Full year past performance data prior to April 2018 is unavailable for BNY Mellon Sustainable Real Return.

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