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It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.
We look at the headlines and trends dominating the Responsible Investment sector, the latest analysis from our research team and how our Wealth Shortlist picks have performed.
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.
It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.
In 2021, flows into responsible investment funds rose almost 37% from 2020 levels. This has been driven by increasing demand from investors, but also from a raft of new fund launches, increasing the number of opportunities on offer.
In this sector review, we look at the headlines and trends dominating the responsible investing world, the latest analysis from our research team and how our Wealth Shortlist picks have performed.
This article isn't personal advice. If you're not sure if an investment is right for you, ask for financial advice.
Key geopolitical events over the last six months have propelled climate change further into the limelight.
The COP26 climate summit saw global leaders update their plans for reducing emissions, and the UK government committed to be the world’s first net zero financial centre. Commitments were made to ‘phase down’ coal, the most polluting fossil fuel. And leaders of countries that are home to 90% of the planet’s forests committed to ‘halt and reverse’ forest loss and land degradation by the end of the decade.
The conference set the tone for increased political and regulatory scrutiny on companies not seen to be doing enough to combat climate change. It’s becoming more important for investors to consider the impact climate change could have on their investments. If that’s through funds, investors should make sure the funds are run by managers that consider this impact too.
At the moment, it’s not always clear how fund managers consider the risks posed by climate change and other sustainability issues. This makes it more difficult for investors to choose which funds to invest in. To help combat this issue, regulation is being rolled out encouraging greater disclosure and transparency.
In the UK, asset managers will have to disclose key climate-related metrics for their funds. Investors will be able to find this information on some fund groups’ websites from next year.
This has led to more companies and fund managers assessing their footprint and committing to a net zero transition. This provision of better information will help investors make more informed decisions about their investments.
While climate change often steals the limelight, there’s recently been a shift towards the social side of responsible investing. The mental health toll of the pandemic, Black Lives Matter protests and the latest hearings of the Grenfell Tower inquiry have drawn attention to the importance of robust social principles and standards.
Human rights, health and safety, fair pay, and diversity and inclusion have become key topics for investors. Many fund managers now consider these issues as part of their company analysis process and engage with companies where there are improvements to be made. Some fund managers even have minimum thresholds that a company’s social policies and practices must meet before they consider investing.
We met a selection of responsible global equity fund managers in recent months, including Jamie Jenkins, lead manager of the BMO Responsible Global Equity fund. This fund avoids companies with damaging business practices and invests in companies that make a positive contribution to society and/or the environment.
The manager recently invested in Vestas, a Danish manufacturer of both onshore and offshore wind turbines. Wind power is one of the most important technologies to help decarbonize electricity supply. Vestas provides this technology to large utility and corporate customers.
In contrast, an investment in US tech giant Microsoft was sold following news that the company was developing augmented reality headsets for battlefield deployment.
Find out more about BMO Responsible Global Equity, including charges
BMO Responsible Global Equity Key Investor Information
We also met with Mark Rogers, co-manager for the LF Montanaro Better World fund. This fund invests in companies that are helping to solve some of the world’s major problems, with a focus on higher-risk smaller companies.
The fund invests across six impact themes – environmental protection, green economy, healthcare, innovative technologies, nutrition, and wellbeing. When choosing companies that fall within these themes, the analysts assess the impact, quality, and valuation of the company. This investment process enables them to pick profitable market leaders that are making a positive impact.
The fund underperformed the broader global stock market over the past year because of the managers’ growth-focused investment style, which fell out of favour with investors.
Find out more about LF Montanaro Better World, including charges
LF Montanaro Better World Key Investor Information
We also recently added the Liontrust Sustainable Future Corporate Bond fund to the Wealth Shortlist. The fund aims to deliver a combination of income and capital growth over the long term by investing mostly in sterling-denominated, investment grade corporate bonds. These are bonds issued by companies deemed to be financially secure, with the ability to pay off their debts in the form of interest to investors.
The fund excludes areas some might find unethical, like tobacco, coal and weapons. It invests mostly in companies making a positive difference to the environment or society.
READ OUR WEALTH SHORTLIST UPDATE FOR LIONTRUST SF CORPORATE BOND
Find out more about Liontrust SF Corporate Bond, including charges
Liontrust SF Corporate Bond Key Investor Information
There are currently six funds in the Responsible Investment sector of the Wealth Shortlist, and several other responsible funds that sit in other sectors.
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.
For more details on each fund and its risks, please see the links to their online factsheets and key investor information below. Remember past performance isn’t 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 30.69%, compared with 32.52% for the broader Indian stock market, although past performance isn’t a guide to the future and 12 months is a very short time period over which to review investments.
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 invests in emerging markets and smaller companies which adds risk.
Find out more about Stewart Investors Indian Subcontinent Sustainability, including charges
Stewart Investors Indian Subcontinent Sustainability Key Investor Information
The Legal & General Future World ESG Developed Index also delivered a strong return, rising 16.47%. This fund aims to track the performance of the Solactive L&G ESG Developed Markets Index, which rose 19.09%. The index increases investments in companies that score well on a variety of ESG criteria and reduces investments in those that score poorly.
It excludes tobacco companies, pure coal producers and makers of controversial weapons (such as cluster munitions, anti-personnel mines, and chemical and biological weapons). It also excludes persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment, and anti-corruption).
Find out more about the Legal & General Future World ESG Developed Index, including charges
Legal & General Future World ESG Developed Index Key Investor Information
BNY Mellon Sustainable Real Returndelivered the lowest return, rising 2.02%, compared with 3.44% for the broader 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 funds only investing in shares 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 and those incompatible with the aim of limiting global warming to 2°C aren’t considered for the fund. It also won't invest in any company that makes more than 10% of its revenues from tobacco and a range of other areas some investors could consider unethical.
The fund can invest in emerging markets, high yield bonds and derivatives which increases risk.
Find out more about the BNY Mellon Sustainable Real Return, including charges
BNY Mellon Sustainable Real Return Key Investor Information
Annual percentage growth | |||||
---|---|---|---|---|---|
Jan 17 -
Jan 18 |
Jan 18 -
Jan 19 |
Jan 19 -
Jan 20 |
Jan 20 -
Jan 21 |
Jan 21 -
Jan 22 | |
LF Montanaro Better World | n/a | n/a | n/a | 37.39 | -6.76 |
IA Global | 12.93% | -1.63% | 16.91% | 14.33% | 9.94% |
Stewart Investors Indian Subcontinent Sustainability | 14.33% | 0.12% | 5.43% | 14.51% | 30.69% |
FTSE India | 22.74% | -6.66% | 8.12% | 11.12% | 32.52% |
Legal & General Future World ESG Developed Index | n/a | n/a | n/a | 13.23%* | 16.47% |
Solactive L&G Enhanced ESG Developed | n/a | n/a | 20.63% | 12.73% | 20.29% |
BNY Mellon Sustainable Real Return | n/a | n/a | 10.53% | 8.48% | 2.02% |
IA Targeted Absolute Return | 3.83% | -2.48% | 3.7% | 2.5% | 3.44% |
Past performance is not a guide to the future. Source: Lipper IM, to 31/01/2022.
n/a – full year past performance data for this period is unavailable.
*Performance data shown is for an older unit class.
Guide to responsible investment
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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.
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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