Align your investments with your ethics
Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice. Past performance is not a guide to the future. Correct as at 27 September 2018 unless otherwise stated.
Ethical and sustainable investing has come a long way.
Its roots trace back to the nineteenth century. The Methodist Church in North America wanted to invest in the stock market, but avoid companies that made money from alcohol or gambling. The Quakers followed suit and avoided companies that made weapons.
Today more than a quarter of money managed around the world is invested with environmental, social and governance (ESG) factors in mind. That includes some of the world’s biggest investment funds like Japan’s Government Pension Investment Fund (GPIF) and the Dutch pension fund (ABP).
In 2017, Norway’s sovereign wealth fund proposed selling its oil and gas investments, worth more than $35bn. Ironically the $1tn fund was set up to look after the revenues from Norway’s oil industry. It also sold investments in companies that make nuclear weapons or cause excessive environmental damage.
Despite this leap forward, lots of people still don’t know it’s possible to align their investments with their principles. Good Money Week aims to change that. It’s a week-long campaign running from 29 September to 5 October designed to let investors know about the ethical and sustainable options available to them.
Human activity is having a dramatic impact on this blue planet we call home. By 2050, it is estimated there will be 12 billion tonnes of plastic in landfill, and greenhouse gases will have risen 50%. Fast forward another 50 years and it’s almost certain the earth will be two degrees warmer, with profound implications for human health.
As we gain a greater understanding of how our actions affect the planet, the concept of sustainability becomes more important to our day-to-day lives.
Since the millennium, recycling rates have increased by 32% and in the period between 2006 and 2016 renewable energy produced in the EU increased by two thirds.
Many companies now think about their corporate, social and environmental impact. And investors are increasingly considering the environmental, social and governance standards of the companies they invest in.
Not only is this beneficial to the world but also to investment performance. The world’s growing population relies on major developments in areas like clean water, sanitation, energy generation and healthcare. Funds investing with sustainability at the heart of their approach have the potential to benefit from these trends. Evidence also shows businesses with strong environmental, social and governance characteristics are less likely to suffer from incidents that affect their stock price.
We all want to leave the planet in a better state than we found it, but we’d like to grow our investments along the way too.
Investing sustainably is one way you can do both.
All investments fall as rise in value, so you could get back less than you invest. Past performance is not a guide to the future. This video and our research are not advice. If you are unsure of the suitability of an investment for your circumstances, please seek advice.
Why invest with morals in mind?
Investing responsibly is a great way to feel you’re doing some good. We all want to leave the planet in a better shape than we found it. Investing responsibly is one small change that could make a big change for future generations.
Long-term performance potential
Companies that take ethical and sustainability factors seriously might be less likely to encounter problems in the future. For example, if a company has robust health and safety policies in place, it shouldn’t face costly legal cases from something going wrong. And companies that take measures to avoid waste or pollution spills are less likely to suffer reputational damage.
Irresponsible companies could be forced to improve
It’s easy to complain about something. But investing with morals in mind lets you reward companies that act responsibly towards the environment and society. As more and more people start investing their money responsibly, the bad apples will be forced to shape up or risk falling out of favour with investors.
What does it mean to invest ethically?
Investing ethically means you don’t have to compromise your principles in the pursuit of financial return.
But principles are personal. Something that looks bad to one person might seem like a necessary evil to others. Take animal testing. Some say it can’t be justified under any circumstances. Others suggest it’s necessary to develop society.
Ethical and sustainably managed funds might avoid or focus on specific companies or areas of the market. So at times they’ll perform differently to funds that don’t have the same constraints. How differently they perform depends on how restrictive their approach is.
That’s why you should clarify each fund’s approach and make sure it’s consistent with your views before you invest.
Our latest ideas
Good Money Week could be a great time to check if your portfolio is aligned with your investment goals and views.
But just because a company or fund is focused on ethical issues doesn’t necessarily make it a good investment or mean it’ll perform better than those that aren’t.
Here you’ll find our latest ideas for investors who want to try and grow their money in a way that reflects their values.
Plus we think they’re great investments in their own right. You could consider them even if you’re not a sustainable or ethical investor.
If you’d like to learn more about the pros and cons of investing with your principles in mind, please read our guide to ethical and sustainable investing.
It’s not easy to invest ethically.
Plenty of research is needed to make sure you fully understand what a company’s involved in. And there might be large parts of the stock market that you can’t invest in to fit with your views. This will affect your investment’s performance.
It might be better left to an experienced fund manager.
We think Audrey Ryan is one of the best. She’s a passionate ethical investor and managed the Kames Ethical Equity Fund, which invests in the UK, for almost two decades.
She uses a strict approach and excludes certain areas completely. She won’t invest in companies involved in activities she deems unethical. From tobacco and alcohol producers, to munitions manufacturers and companies that use animal testing.
Where are the opportunities?
The fund is quite diversified even though it avoids certain areas. It currently invests in a number of financial companies, which Audrey Ryan thinks have excellent performance potential. Current investments include asset managers Brewin Dolphin, Rathbones and Standard Life Aberdeen, as well as life insurer Aviva.
Technology is a theme that could offer lots of opportunities over the coming years. So she also invests in companies that could benefit from the growth of e-commerce, such as GB Group. It helps companies protect themselves and their customers against online fraud by offering identity verification services.
A superb long-term track record
The fund’s done exceptionally well since Audrey Ryan took control in January 1999. It’s grown 282.2%* compared with 196.3% for the broader UK stock market, though past performance isn’t a guide to the future. Investments can fall in value as well as rise and you may not get back what you have invested.
Kames Ethical Equity - performance under Audrey Ryan
Past performance is not a guide to the future. Source*: Lipper IM to 31/08/2018
|Annual percentage growth|
| Aug 2013 -
| Aug 2014 -
| Aug 2015 -
| Aug 2016 -
| Aug 2017 -
|Kames Ethical Equity||11.4%||9.8%||5.5%||7.7%||6.4%|
Past performance is not a guide to the future. Source: Lipper IM to 31/08/2018
The fund can’t invest in 69% of the UK’s largest companies because they operate in areas like oil & gas, tobacco and munitions. So around half the fund is invested in small and medium-sized companies, which are higher-risk than larger businesses.
Our analysis shows this has helped the fund perform better than the UK stock market over the long term, though there are no guarantees this will continue.
We think this fund is a great option for investors who want to invest ethically in the UK stock market. That said, you should read the fund’s investment criteria and make sure it’s consistent with your views before considering an investment.
Heather: I'm here with Audrey Ryan to talk about her Kames Ethical Equity Fund. Hi Audrey.
Audrey: Hi there.
Heather: So what is ethical, how do you define it, and what does it mean to you?
Audrey: We've been offering an ethical equity fund to our clients for almost thirty years. We launched the fund in 1989 and it was one of the first funds that were launched within the marketplace providing an ethical opportunity for the investor. The ethical fund that we have is particularly suited to someone who has fairly strong views with regards to their ethical principles or indeed their ethical morals and what we're doing with our UK ethical vehicle is screening companies out based on the products, the activities, or services that they undertake which could be either harmful to society or indeed harmful to the environment, so it's one of the strictest funds in the marketplace but very much still in demand from the ethical investor.
Heather: So what sort of things do you screen out?
Audrey: So we have twelve ethical principles proprietary to us that we look for in the companies that we invest in. It is negatively screened and for example there will be the traditional addictions where we will screen out tobacco and alcohol. We also will not invest in companies who are involved in the arms or the military and the fund that we have is particularly strong from an animal welfare point of view so you know we do not invest in businesses that are involved in any form of animal testing
Heather: So a lot of the companies that you mention are some of the UK's largest companies, does that mean you don't have very many large companies in the fund?
Audrey: Yes, looking back at the history of the fund typically we do have more of an exposure within the fund towards UK small and mid-cap stocks, the majority of the top 20 companies in the UK equity market do not pass our screens, so whether they are the large oil and gas companies or the large mining companies or indeed many of the traditional staple-related sectors such as food retail, aerospace, and beverages, so as you rightly say the fund is much more skewed towards FTSE 250 and FTSE small cap rather than the large-cap names within the marketplace
Heather: So you have your screen, it's screened out all of the companies that you feel aren't ethical enough to be invested in, how many companies are you left with then to choose from?
Audrey: With regards to the FTSE All Share I can invest in approximately 300 companies for the ethical equity fund and that number has been fairly stable over the last few years. I can still invest in quite a variety of sectors and indeed a variety of the indices. In terms of generating ideas for the portfolio itself once it's passed the ethical screen I as a fund manager very much leverage the strong investment ideas coming from within our UK equity team. We have nine individuals researching the UK small, mid, and large cap marketplace and so the ideas that I populate the fund with from a bottom-up perspective are very much driven by a UK-based research team
Heather: And there's often an argument that you can either invest ethically or you can invest in a fund that's going to perform strongly, what would you say to that?
Audrey: The ethical equity fund that we manage is almost 30 years old, we launched it in 1989 and certainly our performance data would absolutely dispel any myth that investing ethically brings with it a long-term performance penalty for the client. Looking at the returns that we've delivered in the fund since launch we've actually outperformed the investment association median fund over that time frame so we would argue that investing ethically does not bring with it a long-term performance penalty.
Heather: Thank you.
Audrey: Thank you.
This video is not personal advice to invest in any of the investments mentioned. If you are unsure whether an investment is right for you, please seek advice.
The value of investments can fall as well as rise, so you could get back less than you invest. Past performance is not a guide to the future.
The fund invests in smaller companies which increases risk. Please see the fund’s key investor information for more details on risks and charges.
Filmed in June 2018. Audrey Ryan’s views are not necessarily shared by Hargreaves Lansdown.
Please note, this fund holds shares in Hargreaves Lansdown plc.
Kames Ethical Equity
There’s more than one way to incorporate values into your investment portfolio.
Some fund managers, like Audrey Ryan, exclude certain sectors completely. But others use a less restrictive approach. This means they could technically invest in any type of company, as long as it meets their criteria.
David Gait and the team behind the Stewart Investors Asia Pacific Leaders Fund think stewardship is key to investment success. They invest clients’ money as if it were their own. So they look for companies run in a sustainable way, which could drive long-term growth.
Sustainability - what does it mean?
Sustainability issues include climate change, food and water shortages, poverty, and ethnic and gender inequality. It also includes safety, management and governance scandals.
The team take these issues into account when they analyse companies. They only invest in those that make a positive contribution to society and the countries where they’re based.
They also engage closely with company management. It helps them make sure management keep on track with sustainability issues, or encourage them to change their behaviour if needed.
The managers currently like a lot of consumer companies, which make up almost 30% of the fund. But they’re careful about which ones they invest in.
Take a company that mainly sells products with high levels of sugar, salt and fat. If consumed in excess, these products could have a negative impact on society through bad health and increased health costs. Over the long term this could attract negative attention from regulators, politicians and investors. Tighter regulation, advertising controls and wider campaigns could follow, damage the company and affect its profits.
But companies that sell healthier foods or everyday essentials, such as toothpaste and soap, are less likely to face these headwinds. So companies such as Unicharm, a Japanese business that makes hygiene and cleaning products, are currently held in the fund.
This fund invests in companies based across Asia – from India to Taiwan and Singapore to the Philippines. So it combines exposure to some of the fastest-growing regions of the world with a focus on companies that put social and governance issues at the heart of what they do.
We think this is a great combination.
Not only that, it means you’re investing with some of the most experienced investors in Asian companies. The team have 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. Investments can fall in value as well as rise and you may not get back what you have invested.
David Gait - career track record
Past performance is not a guide to the future. Source: Lipper IM to 31/08/2018
|Annual percentage growth|
| Aug 2013 -
| Aug 2014 -
| Aug 2015 -
| Aug 2016 -
| Aug 2017 -
|Stewart Investors Asia Pacific Leaders||16.1%||-0.5%||27.0%||11.2%||11.5%|
|FTSE AW Asia Pacific ex Japan||13.3%||-11.8%||34.3%||23.7%||2.4%|
Past performance is not a guide to the future. Source: HL to 31/08/2018
Stewart Investors Asia Pacific Leaders
A personal touch
With ethical and sustainable investing, beauty is in the eye of the beholder. Everyone draws lines in different places.
That subjectivity can be a problem for fund investors. Even a specialist ethical fund manager might invest in companies that don’t quite fit with your own values.
Picking your own shares can help solve the problem. It gives you that extra control over where your money is. Still, always remember that holding a small number of individual shares comes with extra risk.
Here, I take a closer look at some companies in the FTSE4Good UK 50 index. While I give a few lines on the factors that’ve helped them make the cut, it’s of course up to you to decide whether they fit your own criteria. Please remember that all investments can fall as well as rise in value so you could get back less than you invest, and yields aren’t a reliable indicator of what you’ll get in the future.
When taking over as CEO of Unilever, back in January 2009, Paul Polman told investors he’d be prioritising sustainability over short-term profiteering.
He’s stayed true to his word. When fending off a takeover from Kraft Heinz in late 2016, Polman passionately urged investors to preserve Unilever’s ‘sustainable’ model and not succumb to Kraft’s advances.
Unilever’s commitment to various ethical causes hasn’t detracted from shareholder returns. The odd blip aside, the share price has so far consistently risen over Polman’s tenure, underpinned by growth in profits and dividends. This serves as a reminder that a sustainable mind-set and financial progress aren’t mutually exclusive, but doesn’t serve as a template for what the next 10 years will look like.
Still, we think there’s reason to be optimistic about the group’s long-term prospects.
Unilever sells everyday essentials like Dove and Persil to billions of consumers the world over. That gives it a solid and diverse base of revenues, but there’s plenty of room for growth.
Most of its business is conducted in faster-growing emerging markets. These economies have historically been volatile, so growth can come in fits and starts. But over time, the top line should get a tailwind as economies like Brazil and India mature though of course there are no guarantees.
The dividend is well covered by both cash flow and earnings, and if Unilever’s margin expansion plan delivers the benefits it predicts, the next few years could see the payout grow further. The shares currently offer a prospective yield of 3.4% next year.
The potential for quicker growth means the shares trade on 19.9 times expected earnings, slightly above their long run average.
Tesco pledged to achieve zero net deforestation as soon as 2020, and no longer uses palm oil from unsustainable sources in its own products.
But all that’s only relevant if there’s people buying the finished goods.
After a dreadful period in the middle of the decade, like-for-like sales have been growing again. In fact, Tesco recently reported 10 consecutive quarters of growth.
That’s been helped by significant investments in pricing and customer experience. The purchase of wholesaler Booker and a supply deal with French giant Carrefour shows Tesco is looking to make improvements behind the scenes too. Provided all goes to plan, these deals will improve buying power and operating efficiency.
The prospective yield is currently 3% next year. Tesco pledges to pay half of its earnings out as a dividend, so if it can keep growing sales and realise the potential benefit of those tie ups, there’s room for the dividend to grow though there are no guarantees.
The pace of growth will also depend on whether some clouds on the horizon skirt past, or thicken up. For example, the risk of a disorderly Brexit, which could squeeze the UK consumer, can’t yet be discounted. All the while, Amazon, which is already making a push into food retail, looks poised to pounce.
Tesco will hope the launch of discount chain Jack’s, named after the group’s founder, will help swing the odds in its favour.
The shares trade on 15.2 times expected earnings.
L&G is a leading pension provider and one of the UK’s biggest insurers. It also has £985bn under management in its investment management division, LGIM.
Ethical investment gets plenty of air time at L&G. The group invests directly in affordable housing, urban regeneration and clean energy. It also runs a selection of ethical tracking funds.
However, the majority of profit comes from the retirement division. It’s made up of offering both individual annuities and final salary pensions. L&G will take over final salary schemes, then build an investment portfolio to match what the scheme has to pay out. L&G effectively takes risk off others hands.
It might sound stodgy, but de-risking pension schemes is a dynamic area. Companies like the idea of shifting the risk on to others, and over £10bn of de-risking business has been done in the UK in each of the last four years. There’s £20bn of business up for grabs this year.
There are other pension tailwinds at play too. Auto-enrolment, which requires employers to set up pension plans for staff automatically, means huge sums are flowing into UK pension schemes. LGIM has a bias towards low-cost tracker funds, so the group should be well placed to benefit from inflows.
While we firmly believe that stock markets rise over time, potential investors should remember all asset management businesses are vulnerable when prices crash, investment values can fall in value as well as rise.
The group’s solvency position is strong, and the shares offer an attractive prospective yield of 6.4%. The potential for further growth means analysts are expecting steady dividend increases from here, although of course there are no guarantees.
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