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Ethical Investing “outperforming non-ethical in US and UK”

Posted by Adrian Lowcock in Press releases category on 07 Oct 19


  • Ethical indices beat their non-ethical peers over 10 years
  • Ethical investments have risen 17% to £20bn in August 2019
  • 3 different approaches to ethical investing
  • Ethical investment ideas
Good Money Week (5th - 11th October) which looks to promote sustainable, responsible and ethical investing, is now in its 12th year, with the performance of ethical investment strategies being taken more seriously than ever.

Ethical investing arose from the desire of some individuals who wanted to invest in line with their ethics and principles. The initial view was to avoid companies that were perceived to be unethical (e.g. Tobacco, Defence) or that were environmentally unfriendly (Mining, Oil Explorers). 

There are different ways to invest ethically, with the principles behind it evolving over time. While initially it was used as a mean of avoiding companies seen as environmentally damaging or unethical, the view has shifted in recent years to supporting companies that are making positive changes in their behaviour in order to have an impact on our environment and society.  This has led to a wave of new funds and definitions being applied to the sector.

Nonetheless, while the UK’s retail ethical investment industry has been around since 1984, statistics from the Investment Association show funds with ‘ethical’ mandates total just £20 billion.

This represents 1.6% of total industry assets, but whilst it is a small proportion of the whole, it has risen 17% in a year.

Leading Ethical indices beat their non-ethical peers over 10 years

In the past, ethical investing was thought of as a lower-return strategy, aimed at people who wanted to put their morals above profits. But now evidence suggests that the opposite is true. Ethical equity indices have beaten their mainstream peers in the UK and US over 1,3,5 and 10 years.

UK

  1 year 3 years 5 years 10 years
FTSE4GOOD UK 1% 19% 38% 125%
FTSE All Share -1% 15% 35% 118%
US

  1 year 3 years 5 years 10 years
FTSE4GOOD UK 8% 55% 123% 373%
S&P 500 6 45% 105% 321%
Adrian Lowcock, Head of Personal Investing, Willis Owen: 

“The performance of ethical benchmarks over the last 10 years has been better than non-ethical counterparts. Much of this has been driven by oil and mining sectors, which have suffered over the last few years amid falls in the oil price, and more recently the Tobacco sectors. Many ethical funds have no exposure to these areas and therefore have protected investors from the falls.

“The larger gap for the US market can be explained by a strong performance in the technology sector in recent years.

“Whilst the uptake of specific ethical funds remains low, there is a significant change in attitude amongst professional investors. The sector has evolved hugely over the past 30 years.  It is no longer just about avoiding certain types of companies or accepting a lower rate of return because of your morals. The evidence is growing that companies which behave responsibly and incorporate Environmental, Social and Governance principles into their businesses are better custodians of capital, and in turn provide better long term returns for investors.” 

“Investors can now choose how they engage with ethical criteria, deciding whether to avoid certain areas of the market, through traditional negative ethical screens, or proactively invest in businesses looking to initiate change. Other investors’ top priority may still be investment performance, but many understand that how a company behaves will have an impact on the sustainability of the business and its future profits, and this approach is increasingly being catered for as well.

Three tips on how to do good for your portfolio and the planet’s future

  1. Start small – You don’t need to switch your entire portfolio into ethical funds but could consider putting 5% into areas which you are most interested in
  2. Look for funds with a high sustainability rating – Sustainability themes are about looking at companies that operate in a sustainable fashion. This makes good business sense as well as having that feelgood factor. You can check if a fund has a high sustainability score at Willis Owen.
  3. Look for fund groups that incorporate ESG into their investment process. Different groups approach this differently but the more a fund group has spent on ESG the more seriously they take it.
Ethical investment ideas

Kames Ethical Cautious Managed - This fund, managed by experienced ethical investors Audrey Ryan and Iain Buckle, invests in UK shares and bonds. It applies a strict ethical filter to its investment process which excludes mining and energy stocks, tobacco and banks with investment banking operations.  The fund also excludes government gilts on the bond side which results in a very different fund to many peers. The fund tends to have a bias towards medium and smaller sized companies, as well as favouring cyclical stocks. The team focus on a combination of stock selection and wider economic analysis to generate ideas and construct a portfolio of investments. 

Stewart Investors Worldwide Sustainability fund - The fund invests in global equities and would suit as a core position, or as one for someone seeking to build a sustainably focused portfolio.  The investment process will take account of sustainability themes and issues and requires positive engagement with companies in respect of these. Manager David Gait focuses on stock selection and conducts thorough fundamental analysis, with a heavy focus on the sustainability of earnings and business models. There is a preference for high-calibre management in franchise companies backed by healthy balance sheets. The price they pay for a business is important, but a company’s quality aspects are the priority.

ASI UK Ethical Equity - This fund follows a strict ethical process, which includes both negative and positive screening, where a number of companies and industries are screened in or out of the stock selection process depending on their impact on the environment or society. Exclusions include: companies that cause environmental damage, animal testing, genetic engineering, intensive farming, alcohol, gambling, pornography, tobacco and weapons. Positive factors it actively screens for include: environmental technology and pollution control companies, companies that promote equal opportunities, companies that donate to charities or are strongly involved in the community, and companies with good principles of business behaviour and ethics.