Bear market: Ethical funds invest in firms offering solutions to environmental issues
Fund managers trying to woo younger investors are backing firms that do good in the world. Ethical funds are undergoing a major overhaul as asset managers try to work out what is important to the next generation of investors.
Catherine Howarth, chief executive at Share Action, a charity which promotes responsible investment, says: ‘There is a generational shift taking place in investing. Ethical funds in the 1980s were focused on avoiding arms, pornography and tobacco, but millennials are more interested in labour rights and the environment.
‘Funds need to reflect the priorities of a new generation.’
Ethical funds emerged in the 1980s as a way to help investors avoid firms profiting from questionable activities.
Managers of these funds use a screening process that rules out investing in businesses that make money from pornography, alcohol or arms trading, for example.
While some investors might fear that restricting the firms they can invest in will limit the returns they make, the performance of many ethical funds has been strong.
For example the Premier Ethical fund is up 121 per cent over the past five years, compared to a 72 per cent increase in the FTSE All Share Index.
There are some 100 ethical and sustainable funds and many are shifting their focus to the issues that matter to millennials.
Amanda Young, head of responsible investing at Standard Life Investments, says: ‘What we are seeing is a move away from a list of “thou shalt not” criteria, to actively seeking out those companies which are doing good in the world.’
Standard Life plans to launch a so-called Impact Investing fund with a focus on the positive steps companies are making for the environment.
The fund is considering buying into recycling company Umicore because Young likes firms that re-use material to reduce waste.
She also likes cardboard box maker DS Smith because it recycles its own packaging rather than cutting down trees to make its products. Each box is typically recycled and remade seven times.
Young says: ‘To qualify for investment we want actual, measurable details about how a company is making a positive impact. We want to know how many trees its process saves, or how much water it conserves.’
Once the team is confident a firm is doing good, it maps out the operations of the business to discover if it is operating in deprived areas of the world – another important criterion.
For instance, Safaricom is a Kenyan business that provides financial services through mobile phones to populations with no other access to banking. The company’s work has a measurable impact.
Young says: ‘The world has changed. Fifty years ago you would not know where a company was operating or the details of its accounts. Now millennials can get all of this information easily and can make informed decisions about the types of companies they want to back.’
Simon Bond is manager of the Threadneedle UK Social Bond fund, which has returned 20 per cent over the past three years.
He invests in bonds issued by leading companies, which pay a regular income. He prefers bonds where the money is ring-fenced for a specific social purpose.
Bond says: ‘Any corporate bond can be a social bond as long as it delivers a positive outcome for society.’
His bond choices include those issued by Motability, which provides finance for carers of disabled people so they can adapt their cars, and Transport for London, which is for spending on transport infrastructure such as the Cycle Superhighway and improvements to ticket halls.
‘Anything that helps to ease commuters’ lives, I would say was definitely a social bond,’ says Bond.
But while ethical funds are evolving, still only around 1 per cent of the £1 trillion that investors hold in funds is put into them.
Laith Khalaf, senior investment analyst at Hargreaves Lansdown, says: ‘I think the problem you get if you only invest in companies which have a positive impact is that you narrow down the number of firms you can invest in considerably and that can make it more difficult to generate returns.’