Five socially responsible funds added to our Foundation Fundlist

To meet growing demand we are pleased to add a selection of socially responsible funds to our list of preferred investments.

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  1. Rob Morgan

Ethical and socially responsible investing has become increasingly popular as more people want their investments to make a positive contribution to society and the environment.

This type of investing encourages corporate behaviour that promotes environmental stewardship, consumer protection and human rights. In addition, it usually means actively avoiding businesses involved in areas deemed harmful such as alcohol, tobacco, gambling, weapons or animal testing. Meanwhile, issues such as energy efficiency, water scarcity, safety, and diversity are increasingly being targeted by more specialist funds.

To meet this growing demand we have conducted a thorough review of funds in this area and are pleased to add a selection of funds to our Foundation Fundlist of preferred investments across the major sectors.

Types of ethical and socially responsible investing

Not all ethical and socially responsible funds are the same. They can have very different objectives and rationale for selecting investments.  Funds may use one or a combination of these main approaches:

Negative screening – avoiding companies engaged in what are perceived to be harmful activities, such as tobacco, gambling or manufacturing weapons.

Positive screening – Rather than avoiding certain areas, the manager will assess each sector, looking for the 'best-in-class' companies to use and favouring those that contribute most positively to society or the environment.

Engagement – actively engaging with firms in order to promote socially responsible business practice.

Sustainability – this form of investing considers a range of environmental, social and governance (ESG) factors in determining the impact a company has on society and the environment. The logic is that good corporate citizens tend to have longevity and more chance of success. Bad practices, meanwhile, in regard to climate change or health and safety, for instance, might ultimately be harmful to a business.

Impact investing – impact funds target firms making a positive impact on society and the environment. They might, for instance, be companies tackling challenges such as climate change, water management or pollution.

Limitations of ethical and socially responsible funds

Although funds vary a great deal, they all have a process that to some degree reduces the size of the universe of available investments. It often means some large companies and sectors being absent from a portfolio, which can either work for or against them in terms of performance over a given period.

With a smaller pool of companies from which to choose, ethical funds can also be less diversified and more volatile, meaning they experience greater ups and downs. Many industries excluded by ethical funds, such as tobacco, beverages (alcohol) and some healthcare companies, are often considered more defensive, so it can mean taking more risk.

In addition, larger firms are often screened out by negative criteria meaning fund managers must seek an alternative among smaller companies, which can also be riskier. The picture can change, however, when considering ESG characteristics as bigger companies can often devote more to sustainability programs.

While investors may be interested in the concept of investing ethically, it may involve some compromise. The objectives for most investors are maximising returns and managing risk, but both of these could be more difficult to achieve when taking an ethical approach, especially a strict one. In-built biases could mean more is invested in higher risk smaller companies or it may be difficult to find high yielding investments.

Yet in the longer term we see no reason why investing ethically should mean having to sacrifice performance, especially as there is a growing range of strong fund options in the area – as we discovered in our recent review.

Ethical and socially responsible funds added to the Foundation Fundlist

The Foundation Fundlist represents our preferred investments across various sectors. We have chosen a selection of ethical funds to cover broader investments areas such as global equities, UK equities and bonds. Inclusion does not imply a specific recommendation.

Our ethical fund selection involves the same criteria for identifying talented managers applying rigorous stock selection processes. In addition, we seek to identify funds making a positive social and environmental impact while avoiding any areas considered unethical or controversial.

To cover every investor’s ethical “wish list” is impossible. However, we believe all the new additions provide options that can go some way to satisfy an individual’s ethical goals. Each fund should be carefully considered to see if it fits with your own principles.

Baillie Gifford Positive Change shares a number of characteristics with other Baillie Gifford global funds: A high-conviction, concentrated portfolio, which increases risk as well as return potential, a search for exceptional growth businesses, and a low turnover of holdings resulting from investments being kept for the long term and not actively ‘traded’.  The difference is this fund specifically aims to contribute toward a more sustainable and inclusive world while generating strong returns by investing in four ‘impact themes’: Social inclusion and education, environment and resource needs, healthcare and quality of life and ‘base of the pyramid’ (companies addressing the basic needs of the global poorest).  In addition, the group have always employed an active approach to corporate engagement and pride themselves on their ability to influence company behaviour at the board level.

EdenTree Amity International is a long-standing ethical fund with a stable team and a ‘value’ led philosophy. Stocks must pass both negative and positive screens in order to be considered for inclusion in the portfolio. We believe the fund offers a differentiated portfolio of responsible and sustainable companies, and important diversification from the more growth-oriented funds that are prevalent in the ethical space.

WHEB Asset Management is a small boutique investment house that features a stable and highly experienced team in the field of sustainable and impact investing. In contrast to some forms of ethical investing, which seek to simply screen out companies engaged in ‘unacceptable’ practices, WHEB focus on the positive with FP WHEB Sustainability Fund specifically targeting opportunities created by the transition to a low carbon and sustainable global economy. The managers argue that in doing so they should ultimately outperform as this trend is inevitable, and well-run companies providing solutions to sustainability challenges should be poised to thrive.

Liontrust Sustainable Future UK Growth invests in 40 to 60 UK companies that meet the managers’ rules for environmental and social responsibility. The portfolio is constructed from high-quality stocks with a strong sustainability theme benefitting from long-term secular drivers and structural trends. The management team is highly regarded having established a track record at Aviva and Alliance Trust prior to joining Liontrust.

Threadneedle UK Social Bond Fund represents a significant innovation in ethical fixed interest investing. A partnership between Columbia Threadneedle and Big Issue Invest, it seeks to back companies and organisations in supporting socially beneficial activities in eight areas: affordable housing, education, employment and training, health and social care, financial inclusion, community services, transport and communication infrastructure, and utilities and the environment. Although there are some additional risks in investing in a more concentrated and esoteric bond fund, we believe this is a well thought out investment and the tangible social impact style should resonate with ethically minded investors.

An article about each fund will shortly be available in this section of the website, setting out the investment process and style in more detail as well as the nature of the ethical or sustainable values.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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