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Two ESG funds for 2020 and beyond

We look at how the managers of Kames Ethical Equity and First State Asia Focus integrate Environmental, Social and Governance (ESG) analysis into their investment processes.

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.

Investing with Environmental, Social and Governance (ESG) issues in mind has become extremely popular in recent years. And it's easy to see why.

David Attenborough's Blue Planet II documentary and the Extinction Rebellion protests have thrust climate issues into the public eye. The government's responded by introducing plans to cut greenhouse gas emissions to 'net zero' by 2050. That means emissions will have to be avoided completely or – if that's impossible – offset by planting trees or sucking carbon dioxide out of the atmosphere.

More legislation designed to improve sustainability is expected in the near future and companies that fall foul could face penalties.

Integrating ESG is a great way to futureproof your portfolio against potential regulatory and legislative changes. It also means you can do your bit to help create a more sustainable future for our children and grandchildren.

Few investors have the time to research ESG issues for themselves. The good news is that you don’t have to. You can simply invest in funds run by managers who take ESG issues into account for you.

Below we look at two funds which integrate ESG analysis into their investment processes. Each fund manager will integrate ESG in a slightly different way so it's worth checking a fund invests in a way that's consistent with your views before you invest.

This article is not personal advice. If you’re unsure, please seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

Kames Ethical Equity

Kames is a fund management company focused on responsible investing. They aim to identify and understand the key 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.

The Kames Ethical Equity Fund has been managed by Audrey Ryan for more than two decades. She's a passionate ethical investor with a good track record.

Ryan uses a strict approach and excludes certain areas completely. She won’t invest in companies involved in activities deemed unethical, from tobacco and alcohol producers, to munitions manufacturers and companies that use animal testing.

More than 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. Past performance isn't a guide to future returns though.

We think Ryan has the potential to deliver good returns for ethical investors over the long run, although there are no guarantees.

This fund currently holds shares in Hargreaves Lansdown plc.

Annual percentage growth
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
Kames Ethical Equity 13.6% -0.3% 13.5% -17.4% 31.3%
FTSE All-Share 1.0% 16.8% 13.1% -9.5% 19.2%

Past performance is not a guide to the future Source: Lipper IM to 31/12/2019

More on this fund including charges

Kames Ethical Equity Key Investor Information

First State Asia Focus

For Martin Lau and the rest of the team behind the First State Asia Focus Fund, environmental, social and governance considerations are a natural extension of the same investment process they've used for decades.

The team's philosophy is founded on stewardship. When they make an investment, they see themselves as part-owners of the business and want to make sure it's run in a way that benefits all shareholders. ESG issues form a core part of this.

For example, they don't like companies that make reckless decisions in the pursuit of short-term gains, rather than focusing on longer-term, more sustainable growth. A business shouldn't exploit its workforce, take advantage of tax loopholes, or skirt around industry legislation. Importantly, it should cause little, if any, harm to the environment and society. This means they're unlikely to invest in companies like weapons manufacturers or bookmakers, but only tobacco companies are specifically excluded.

Lau and his team are some of the most experienced investors in Asian companies. They've built an exceptional track record and shown an ability to invest in companies with great long-term prospects. Past performance isn’t a guide to the future though and investments in emerging markets are higher risk, so a long-term outlook is essential.

Annual percentage growth
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
First State Asia Focus n/a* 24.7% 26.3% -1.6% 15.9%
FTSE Asia Pacific ex Japan -3.5% 28.7% 23.4% -8.5% 14.5%

*n/a - past performance data unavailable.

Past performance is not a guide to the future Source: Lipper IM to 31/12/2019.

More on this fund including charges

First State Asia Focus Key Investor Information

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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