Best Ethical Investment Funds: Our Top Picks In 2023
Ethical investment funds have been available for well over 20 years, but with recent world events, there has been a new surge in interest in sustainable investing.
With climate change becoming a focus increasingly for world governments, investment managers are being pressured to support initiatives that provide positive solutions to mitigate the impact of human activity on our planet.
In the last 24 months, as well as campaigners such as Greta Thunberg and Extinction Rebellion, who have caught the headlines in waking people up to the real impact of climate change, more people are recognizing that changing weather patterns which have led to the recent devastating fires in Australia, recent unprecedented locust plagues in east Africa and Pakistan, flooding at record levels across the world. The ongoing plastic pollution challenge is a present reality that requires action.
The UK government launched in November 2020 a 10 point plan for a green industrial revolution focusing on making the UK a global leader in green technologies. Some of the plans focus on investing in advancing offshore wind, greener buildings, green finance and innovation, which is great news for the environment and good news for investors.
Alok Sharma Minister for the Dept for Business, Energy & Industrial Strategy in a speech at the 3rd global re-invest renewable energy investors meet & expo on 26th November 2020, said:
“To avoid the worst effects of climate change, we must decarbonise the global economy five times faster in the next ten years than we have done over the past twenty.
We all know that the power sector accounts for a quarter of global emissions.
Decarbonising is absolutely vital. Not only to reduce emissions.
But to boost access to power, and to support clean growth and development.”
We have highlighted our selected top ethical investment fund picks that are worth considering:
This fund is fast becoming one of the UK’s most popular funds, with £2.92bn invested run by Citywire AAA-rated fund manager Mike Fox.
“This is a suitable core UK ethical fund for investors wanting to improve their portfolio’s ESG profile,” says Adrian Lowcock, head of personal investing at Willis Owen.
The fund invests in UK equities but can also invest up to 20% in overseas equities.
The Sustainable Leaders fund’s strong record extends over 10 years.
The perspective of the Royal London sustainable management team is that ‘Our premise is in ten years all investing will be sustainable investing because you cannot optimise your risk-return without embedding sustainability into your investment decisions.’
This fund has been particularly popular in the last 6 months with investors with record inflows of £400m.
This relatively new fund, launched in January 2017, has demonstrated strong performance in this short time. The fund invests in a portfolio of 25 to 50 high-quality global companies which can deliver positive change in one of four areas:
- Social inclusion and education
- Environment & resource needs
- Healthcare & quality of life
- Base of the pyramid (addressing the needs of the world’s poorest populations)
This fund made was one of the principal backers behind the US biotechnology company “Moderna” makers of a Covid-19 vaccine.
The fund’s largest exposure is to the healthcare sector (35%), while its top 10 holdings include Tesla Inc, Moderna, and Shopify.
Baillie Gifford Positive Change was one of the most bought funds on the Fidelity and Interactive Investor Platforms in 2021.
The fund has an ongoing charge of 0.53% pa.
Launched in 2002, Impax Environmental Markets is one of the UK’s largest environmental-focused investment trusts, which aims to enable investors to benefit from the growth of more efficient delivery of services such as energy, water and waste.
“The current pandemic has served to highlight many of the existential issues that Impax has highlighted over the years, such as the breakdown in the food supply change and strain on digital/ technology,”
“COVID-19 has provided us with real-life insight into the potential risks facing us as we transition to a more sustainable economy.” John Foster, Fund manager.
It mainly invests in quoted companies which provide, utilise, implement or advise on technology-based systems, products and services in areas such as alternative energy, water treatment, pollution control, waste technology and resource management (which includes sustainable food, agriculture and forestry).
In their ESG policy, they state that:
- Global sustainability challenges will shape capital markets, including climate change, environmental pollution, natural resource constraints, and demographic and human capital issues such as diversity, inclusion and gender equity.
- These trends will drive growth for well-positioned companies and create risks for those unable or unwilling to adapt.
- Fundamental analysis incorporating long-term risks, including environmental, social and governance (ESG) factors, enhances investment decisions.
The fund has an ongoing charge of 1.02% pa.
£25 per month or £100 single
Impax Environmental Markets
ISA, SIPP & Direct Investment
Impax Environmental Markets
Launched in 2017, this fund is an ETF which offers investors access to the green bond market. As of December 2022, the fund had more than EUR587 million in assets under management, making it one of the world’s most significant green bond ETFs in terms of AUM.
The fund is a low-cost index tracker which tracks the Solactive Green Bond EUR USD IG Index, which gives investors access to a portfolio
Green Bonds are the same as standard bonds but have a “green” feature. The idea behind them is to use the money raised for projects that positively affect the environment or contribute to the fight against climate change.
The shift to a low-carbon economy involves investing in ecofriendly assets and projects. Getting public and private investors to buy ‘green bonds’ is an important way of raising the necessary capital.
The Lyxor Green Bond ETF has been awarded the Greenfin label, created by the French Ministry of Ecological Transition and Solidarity in late 2015 to certify a fund’s green credentials. Lyxor is committed to fighting climate change, recently backed up by the launch of the first equity ETF Climate ecosystem designed to meet European Commission standards and reflect the ambitions of the 2015 Paris Agreement.
The fund has a low ongoing charge of 0.25% pa, which you would expect for an index tracker.
Investing ethically often means a fund manager proactively avoids certain companies or industry sectors.
This fund, launched in 2017, adopts similar investment principles to the better-known Fundsmith Equity fund but excludes specific companies and sectors from its investment universe.
Fundsmith is focused on delivering superior investment performance at a reasonable cost. It was established to be different from its peers so as to achieve a different result in line with Sir John Templeton’s axiom that “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
In its short history, the fund has outperformed the average return of funds in the Investment Association’s Global sector.
The investment objective of the Company is to achieve long-term growth in value.
The Company will invest in equities on a global basis. The Company’s approach is to be a long-term investor in its chosen stocks.
It will not adopt short-term trading strategies.
The fund has an ongoing charge of 1.05%.
The rise of sustainable Investing
In the past, investing with your conscience often came with a health warning to expect lower investment returns than conventional funds. However, it is perfectly possible to make a profit and invest with a conscience simultaneously.
The global Covid-19 pandemic has made people rethink – In recent research carried out by HSBC, they found that when analyzing data within the stock market turmoil, shares of companies focused on climate change or ESG issues – environmental, social and governance – outperformed as the virus spread.
HSBC Research found that in the three months after 10 December 2019 ( the date of the first recorded COVID-19 case in China) – climate stocks outperformed global equities by 7.6 %, while high ESG-rated stocks have outperformed by 3.7 per cent.
“A key part of environmental, social and governance is looking at how companies serve society, and what this may mean for the future. When crises manifest – particularly with social and environmental causes and implications, including COVID-19 – we see ESG issues as a defensive characteristic. Investors should consider the materiality of these issues and assess how well businesses manage the associated risks and opportunities”.
Ashim Paun, Co-Head, ESG Research at HSBC
In a Harvard study it was found that companies with good ratings on sustainability issues most relevant to their industries significantly outperformed companies with poor ratings on these issues.
In research carried out by HSBC, it was found that ESG issues make up an estimated average of 43% of the key medium-term financial performance drivers. This rises to an average of 50% for emerging markets and is even higher for sectors like mining, automotive and capital goods.
What is ESG investing?
Investors are increasingly becoming more interested in the environmental, social and governance (ESG) standards of the companies they invest in.
Fund managers in the sustainable, ethical and socially responsible investing (SRI) space put these concerns at the heart of their investment processes to generate financial returns and benefit society simultaneously.
Looking closely at Alok Sharma’s 2020 speech, he went on to say:
” To make the global green energy transition a reality. We need investors to keep seizing the opportunities presented by the renewables revolution. In India and of course around the world.
And these opportunities are enormous.
A study by Imperial College London and the International Energy Agency found that investments in renewables have repeatedly outperformed those in fossil fuels:
Over the past ten years, the past five years, and 2020.
Solar and wind are already cheaper than coal power in two-thirds of countries.
Momentum is building globally behind net zero. China, Japan and South Korea have all recently set targets.
Colleagues and friends will know And on 12th December, the UK will co-host a summit with the UN and France, and our partners Italy and Chile, to mark the fifth anniversary of the Paris Agreement.
This will be the moment for global leaders to show that we can make a step change on climate action.”
Peter Michaelis, head of the Liontrust Sustainable Investment team, helps to provide clarification about the sustainable methods fund managers use.
“The first is negative screening, which, as it suggests, avoids certain industries because of the damaging effects of their products. Examples include weapons and tobacco.
Mr Michaelis explains: “Another approach is to invest in sustainable themes. This is known as positive screening, as it sees funds focusing on what they want to invest in rather than what they want to cut out.
“Such funds may concentrate on a single theme such as renewable energy while others have multiple sustainability themes that can include healthcare, resource efficiency, and education.
“Many cling to the perception that ethical investment is about what you can’t do, whereas we think it’s about what you can do.”
ESG is a recognized way of measuring company sustainability not just from one ethical stance but 3:
- Environmental – looking at how companies make an impact on climate change, how they deal with waste and its management, water stewardship, management of energy resources and mitigation of air and water pollution
- Social – This looks at how companies engage with their staff, customers and communities concerning human rights; consumer privacy; data security; health and safety and gender equality.
- Governance – This addresses how well companies manage their businesses through the board and its executive remuneration structure, the company’s ownership structure, the processes used to report financially, and the organisation’s culture.
A ready-made diversified ethical portfolio, selected & managed by experts. Capital is at risk.
- Invest within a socially responsible investing framework
- Can be held in a stocks & shares ISA or self-invested personal pension
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