In our annual Sustainable Investor Survey, over half of the respondents told us they’re not comfortable investing in companies linked to deforestation, tobacco, animal testing or gambling. Whereas most respondents report being comfortable investing in nuclear energy, alcohol, oil and gas, and military contracting.
But what can investors do when there are some areas of the stock market they would rather avoid, and how can they make sure their investments match their morals?
This article isn’t personal advice. Investments can rise and fall in value, so you could get back less than you invest. If you’re not sure if an action is right for you, ask for financial advice.
What areas are concerning investors?
Our survey shows little tolerance for deforestation-linked activities. Over two thirds of respondents said they’re uncomfortable investing in companies generating revenue from forest loss.
But an estimated 90% of tropical deforestation is driven by globally traded commodity production, like coffee, rubber, palm oil and cocoa. And these products sit at the heart of global supply chains, meaning portfolios could have more exposure to deforestation than investors realise.
When it comes to oil and gas, the tolerance seems more elastic. Younger investors are much more likely to exclude, while older investors are more comfortable profiting from it.
And these exclusions have stayed fairly consistent over the years, except that is, when it comes to defence.
Client comfort with investment exposure to defence-related activities has increased markedly over time, possibly because of changing perceptions amid heightened geopolitical tensions. Defence is increasingly viewed as a necessary component of national security and protection rather than solely a controversial exposure.
Will excluding sectors impact my returns?
Exclusion-based investing sits within the broader spectrum of responsible investing and works by screening out specific companies or industries you believe harm society or the environment, or just aren’t in line with your moral values.
But it’s important to realise, taking an exclusionary approach will likely lead to differences in performance compared with regular non-exclusionary funds. This can be either positive or negative, depending on what’s happening in the wider market.
For example, in recent years many exclusions-based funds have lagged unconstrained peers, partly due to lower exposure to sectors like oil & gas and defence, which have performed strongly. But if the tide turns and these areas start underperforming, exclusions-based funds could benefit.
3 fund ideas for exclusion-based investing
Exclusions vary from fund to fund, so it’s important to understand the specifics of each fund to ensure they match your preferences.
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.
For more details on each fund, its risks, and charges, use the links to their factsheets and key investor information. For more information on the full list of exclusions and screening criteria, read the sustainable disclosures below.
Aegon Ethical Equity
Audrey Ryan has managed Aegon Ethical Equity for almost 30 years. She mainly invests in the shares of UK listed companies. She aims to identify and understand the key environmental, social and governance (ESG) risks of each company, industry and sector she invests in. Ryan believes companies leading 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 generating significant revenues from activities deemed unethical, including tobacco, alcohol and gambling. Companies manufacturing military armaments, nuclear weapons, or associated strategic products, and civilian firearms are also excluded.
The fund also won’t invest in companies operating in countries with poor human rights records if they don’t have solid policies to address this issue.
Investors should also note the fund’s investments in smaller companies, which adds risk.
Baillie Gifford Monthly Income
Baillie Gifford Monthly Income invests across three broad investment areas – shares, real assets (like property) and bonds. It aims to increase the income paid to investors by more than the increase in the consumer prices index (CPI – a measure of inflation) over the long term.
While the fund focuses on income, accumulation units are also available. This income focus means the fund offers diversification to many multi-asset funds that focus on capital growth.
The exclusions applied are not as strict as for some funds. But that being said, exclusions are applied to companies generating significant revenues from the production of military weapon systems and components, fossil fuel extraction and/or production, tobacco manufacturing, and thermal coal distribution.
As well as these exclusions, all investments in the fund are assessed based on their compatibility with a sustainable economy. Only companies that the managers think are compatible are included in the fund.
The fund invests in emerging markets, high yield bonds and uses derivatives, all of which add risk.
Liontrust Sustainable Future Corporate Bond
The Liontrust Sustainable Future Corporate Bond 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.
As the fund mainly invests in bonds, the long-term returns are likely to be lower than funds investing in shares, but investors can expect the size of ups and downs over time to be smaller. The fund could be a good option for investors looking to build an income portfolio or provide diversification to a portfolio focused on shares.
The fund applies a number of exclusions and screening criteria when considering potential investments. This includes areas like deforestation, climate change, weapons systems, alcohol, gambling and tobacco.
The fund invests in high yield bonds and uses derivatives, which adds risk.
