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Go green for growth: ethical investments outperform rivals

Charts show how ethical investments can outperform the market and rivals.

This week marks the 10th year of Good Money Week, an annual event promoting the UK's growing green and ethical investment market. 

It’s a market that has grown enormously over the past decade. In 2007 the independent research organisation EIRIS calculated the green and ethical retail fund market to be worth around £8.9 billion, and it’s remarkable that a similar calculation last year found the UK market now closer to £1.5 trillion.

The market has also become more diverse, with many different interpretations of ‘ethical’ or ‘responsible’, ranging from funds that screen out specific sectors (such as tobacco and gambling), to funds that target ‘positive’ sectors (such as renewable energy technology or healthcare), and those that aim to use shareholder engagement to improve corporate behaviour on issues such as climate change.

But what about the bold claims that by picking out those companies with high standards of environmental, social and corporate governance (ESG) management, someone can outperform the market over the long term?

If we take a look at the performance of green and ethical equity and bond funds over the past decade, we can see that these claims do indeed have substance.

The following charts have been complied by 3D Investing, a company which helps managers develop ethical portfolios.

Tanya Pein is director of the UK Sustainable and Investment Finance Association.

This week marks the 10th year of Good Money Week, an annual event promoting the UK's growing green and ethical investment market. 

It’s a market that has grown enormously over the past decade. In 2007 the independent research organisation EIRIS calculated the green and ethical retail fund market to be worth around £8.9 billion, and it’s remarkable that a similar calculation last year found the UK market now closer to £1.5 trillion.

The market has also become more diverse, with many different interpretations of ‘ethical’ or ‘responsible’, ranging from funds that screen out specific sectors (such as tobacco and gambling), to funds that target ‘positive’ sectors (such as renewable energy technology or healthcare), and those that aim to use shareholder engagement to improve corporate behaviour on issues such as climate change.

But what about the bold claims that by picking out those companies with high standards of environmental, social and corporate governance (ESG) management, someone can outperform the market over the long term?

If we take a look at the performance of green and ethical equity and bond funds over the past decade, we can see that these claims do indeed have substance.

The following charts have been complied by 3D Investing, a company which helps managers develop ethical portfolios.

Tanya Pein is director of the UK Sustainable and Investment Finance Association.

Let’s look first at UK equities. A typical benchmark, such as the Investment Association (IA) UK All Companies benchmark, returned 62.2% from 2012-2017, and an average UK equity fund typically achieved returns of 70.5% in that time.

If we take two standard ethical funds, we do see impressive outperformance. The Royal London Sustainable Leaders Trust, a fund that targets UK companies tackling global issues such as climate change and world health issues, has returned 80.3% over five years. So a conservative choice would give an outperformance of 18.1% on a typical UK equity fund.

If we look at the long-established Liontrust Sustainable Futures UK Growth fund, which has companies such as insulation specialists Kingspan in their top holdings, there is also outperformance. The fund returned 85.4% in the last five years, outperforming the IA benchmark by 23.2%.

Ethical funds have also ridden the rollercoaster of global equities well in the past five years. The IA Global benchmark has returned 71.5% in that period, but the average ethical global equity fund achieved 75.0%, giving an average outperformance of 3.5%.

If we look at specific funds such as the passive fund Vanguard SRI Global Stock and the actively managed Impax Environmental Markets fund, we see outperformance of the global benchmark of 23.2% and 15.1% respectively.

Ethical bond performance

Most of those who have decided to look for calmer waters in the past few years have shifted towards the bond market, and here too there are green and ethical options.

Looking at UK corporate bonds, the IA Sterling Corporate Bond has delivered five-year returns of 34.7%. So how have ethical bond funds, which tend to avoid investment in sectors such as tobacco, the arms industry, and oil and gas (re. climate change risk) fared?

The average ethical sterling corporate bond has delivered five-year performance of 37.2%, giving an average outperformance of 2.5%. There is even more value in specific funds such as the Rathbone Ethical Bond, which returned 42.5% over the same period, and the Royal London Ethical Bond, which delivered 41.7%.

 

All returns images: 3D Investing

Comment & analysis
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