Bestinvest names the ‘Clean Fifteen’ – top investment ideas for environmentally and socially conscious investors01 October 2019
Next week is Good Money Week, an annual campaign to raise awareness of sustainable, responsible and ethical finance. It is an area that has grown in interest as concerns around climate change, pollution of the oceans with plastic waste and standards of corporate behaviour have come to the fore.
Within the UK investment industry, funds badged as “ethical” now stand at £20 billion of assets according to the Investment Association. While this represents just 1.6% of total industry assets under management, this market share has increased from 1.2% over the last decade and ethical funds under management have grown just £4 billion over this period. The universe of funds specifically applying environmental, social and governance criteria also represents the tip of the an iceberg, as fund management groups have increasingly embedded the assessment of non-financial risks into their core investment processes and taken a much more active approach to engaging with the companies they invest in to encourage transparency and high standards of corporate behaviour.
Jason Hollands, Managing Director at Bestinvest commented: “In the past, investors wanting to invest with an ethical, environmental or socially responsible approach had to contend with a relatively limited universe of funds. This made it difficult to build a diversified portfolio across markets and asset classes. Thankfully, in recent years there has been an abundance of new funds launched which is very welcome in extending choice.”
To help investors who prefer to make their own decisions, Bestinvest has put together a selection of funds and investment trusts, rated by their research team, that apply ESG criteria. These funds – dubbed the “Clean Fifteen” – cover a variety of assets classes, including equities, bonds, property and infrastructure, as well as different regional stock markets.
The Clean Fifteen
1. BMO Responsible Global Equity
This “mid green” fund has a global remit to invest in companies that are making a positive contribution to society and the environment, while avoiding those with damaging or unsustainable business practices. The fund’s key investment philosophy is ’invest, avoid and improve’. The screening and engagement of companies is the responsibility of a large internal governance and sustainable investment team. The fund’s ESG policies and stock universe are reviewed by an independent Responsible Investment Advisory Council, whose president is the Archbishop of Canterbury.
2. Fundsmith Sustainable Equity
This fund, managed by City heavyweight Terry Smith, invests in a concentrated portfolio of quality developed market companies from across the globe, able to sustain high rates of return on capital but which also pass the firm’s sustainable screening process. The fund will not invest in the following sectors: Aerospace and Defence, Metals and Mining, Brewers, Distillers and Vintners, Oil, Gas and Consumable Fuels, Casinos and Gaming, Pornography, Gas and Electric Utilities, Tobacco.
3. FP WHEB Sustainability
This fund has a global remit to seek out companies with strong growth prospects linked to nine sustainability themes: environmental services, resource efficiency, water management, sustainable transport, cleaner energy, safety, health, wellbeing and education. The fund has a predominantly positive screening approach, but will also exclude all ‘sin’ sectors e.g. alcohol, tobacco, gambling. It is also fossil fuel-free. An independent Advisory Committee reviews the portfolio holdings each quarter.
4. Impax Environmental Markets IT
This London Stock Exchange listed investment trust, managed by specialist environmental investment boutique Impax, will appeal to investors wanting to use their savings to invest in companies focused on environmental sustainability. The trust has a global remit to invest in businesses involved with technology and services in areas such as energy efficiency, water infrastructure, waste management and renewable energy.
5. Brown Advisory US Sustainable Growth
While the US government has withdrawn from the Paris Accord on climate change, the US stock market is the largest on the globe and home to many companies that are making a difference. This fund has one of the longest track records in US ESG investing and allows investors to access the US markets, screening out companies that derive the majority of their revenues from alcohol, gambling, pornography, tobacco, military equipment, fossil fuels and which use animal testing for nonmedical purposes. Assessment of ESG criteria is incorporated into stock selection.
6. Liontrust UK Ethical
This fund invests in UK listed companies of all sizes, including early adapters and innovators in their sectors. The fund uses both positive and negative screening to analyse companies. Their ethical exclusions include alcohol, animal testing, fossil fuels, gambling, nuclear power, pornography, tobacco and weapons. Despite relatively strict criteria, the fund has delivered impressive returns.
7. Aberdeen Standard Investments UK Ethical
Managed by Lesley Duncan, one of the leading lights of ethical investing, this fund is an option for investors seeking a relatively strict approach which incorporates both negative and positive screening criteria of UK companies. Exclusions include companies that cause environmental damage or are involved in nuclear power, animal testing, genetic engineering, intensive farming, alcohol, gambling, pornography, tobacco and weapons. They also exclude any company with human rights violations or poor business practices. These screens eliminate around 40% of the FTSE All Share by market value. Positive criteria include environmental technology and pollution control, 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.
8. Trojan Ethical Income
This fund is an option for ethically-minded investors looking to receive dividend income. The fund invests in a portfolio of mainly UK equities (approx. 75% UK, 25% Global). The managers have a strong focus on capital preservation. The fund will invest in accordance with the parameters of its ethical investment criteria, which prohibit investments in alcohol, fossil fuels, gambling, pornography, tobacco and armaments.
9. EdenTree Amity European
The fund aims to achieve long-term capital growth with a reasonable level of income, and has a value style bias. It uses both positive and negative screening to analyse companies, with a separate Socially Responsible Investment team and an independent panel reviewing the portfolio to ensure that the firm's criteria for sustainable investments are adhered to. Companies with more than 10% of turnover from alcohol, gambling, pornography, tobacco, weapons, intensive farming, animal testing for cosmetic or household products are excluded.
10. Stewart Investors Asia Pacific Sustainability
The fund invests in large and medium-sized high quality Asian companies – including Australia, New Zealand and Japanese firms - with strong balance sheets and which are assessed as making a positive contribution to the social and economic environment in the country in which they operate. Engagement with management of portfolio companies is key. India is a major theme in the fund, representing 35% of the portfolio, with no exposure to mainland China.
11. Stewart Investors Global Emerging Markets Sustainability
This fund adopts a similar approach to the above fund but focuses on global emerging markets, taking in companies listed in markets such as South Africa and Brazil. A major theme in the portfolio is consumer staples, representing 47% of the fund.
12. Rathbone Ethical Bond
The objective of the fund is to provide a regular, above average income by investing in a range of sterling dominated bonds that meet Rathbone's ethical and financial criteria. The portfolio primarily consists of investment grade corporate bonds, but some high yield and unrated bonds are also included. The team applies both negative and positive screening to all investments considered for the portfolio. The fund will avoid issuers involved in armaments, environmentally unsustainable activities, animal testing, tobacco, nuclear power, alcohol, pornography, gambling and predatory lending.
13. Muzinich Bondyield ESG Hedged
Muzinich is a leading specialist bond investment boutique. This global fund invests in European and US corporate bonds that meet ESG criteria and it is predominantly invested in investment grade bonds. The manager applies a zero tolerance screen for all companies that are noncompliant with the UN Global Compact, all companies involved in the production of controversial weapons and all companies where there is evidence of child labour in their operations. The fund will not invest in a company that generates more than 5% of revenues from the following industries: Alcohol, Tobacco, Gambling, Pornography, Weapons, Nuclear power, Fur and speciality leather.
14. Greencoat UK Wind
This London-listed investment trust invests in large, mainly operational UK wind farms. It targets returns to investors of 8 to 9% pa, including annual dividends that rise in line with inflation. Approximately half of its revenues are linked to the UK government's Renewable Obligation Certificate regime, with the other half determined by power price agreements with the major utility companies.
15. Civitas Social Housing REIT
This is the first UK Real Estate Investment Trust enabling investment in a diversified portfolio of social housing in England and Wales. The REIT is acquiring freehold properties which will be leased on long-term contracts, with the majority of rental income backed by the public sector.
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