UK and US figures show that ethical investing need no longer be a trade-off between returns and principles.
This weekend marks the start of Good Money Week (29 September to 6 October), which aims to promote sustainable, responsible and ethical investing.
According to the latest statistics, leading ethical indices have beaten their non-ethical peers over 10 years.
In the UK, the FTSE4Good UK index beat the FTSE All Share Index, returning 107.23 per cent versus 105.5 per cent over 10 years to 20 September 2018.
Across the Atlantic, in the US, the FTSE4Good US Index returned 204.24 per cent compared with 162.92 per cent for the S&P 500 over 10 years to 20 September 2018.
Ethical investing is no longer a trade-off between returns and principles. The performance of ethical benchmarks over the past 10 years has been driven by the performance of the oil and mining sectors, which have lagged the market over the past decade, as well the tobacco sectors. Many ethical funds have no exposure to such areas and have therefore protected investors from the falls.
Small is beautiful
In addition, ethical funds have benefited from the outperformance of small- and mid-sized companies as ethical funds usually have a bias away from large firms.
The larger gap for the US market can be explained by a strong performance in the technology sector in recent years, while the energy sector has been volatile after a collapse in the oil price in 2015-16.
While the uptake of specific ethical funds remains low, the overall sector has evolved significantly over the past 30 years.
The evidence is growing that companies that behave responsibly and incorporate environmental, social and governance principles into their businesses are better custodians of those companies and, in turn, provide better long-term returns for investors.
Ethical fund ideas
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. The fund tends to have a bias towards mid- and smaller 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.
The fund invests in global equities and would suit as a core invest or someone seeking to build a sustainably focused portfolio. The investment process takes account of sustainability themes and issues and requires positive engagement with companies in respect of these. The 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.
Adrian Lowcock is head of personal investing at Willis Owen.