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Tax, investments and pension rules can change over time so the information below may not be current. This article was correct at the time of publishing, however, it may no longer reflect our views on this topic.
We look at the headlines and trends dominating the Responsible Investment sector, the latest analysis from our research team and how our Wealth Shortlist picks have performed.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
6 September 2022
Lots of fund sectors have seen significant outflows so far this year (to the end of June). However, the latest Investment Association data suggests that, flows into Responsible Investment funds have remained positive, with more than £5.2bn invested over the period.
Responsible investment funds have delivered strong returns in recent years. But 2022 has proven more challenging, with many enduring their worst periods of performance since launch. Despite this, responsible investing remains popular.
In this sector review, we look at the factors that have dragged on the performance of responsible investment funds so far this year and share our outlook for the future. We also explore how our Wealth Shortlist picks have performed.
This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. Investments can fall as well as rise in value, so you could get back less than you put in.
Most responsible investment funds avoid investing in areas deemed controversial. The exact exclusions differ from fund to fund, but most avoid sectors like tobacco, alcohol, gambling, fossil fuels and defence.
Instead they tend to focus on areas like technology, healthcare and financials. This means their performance will be different from more conventional funds and the broader stock market at times.
That’s been the case so far this year. Life returning to normality, following the pandemic, boosted demand for oil globally. Meanwhile Russia’s invasion of Ukraine restricted the supply of oil and caused the oil price to rise even further. This boosted the share prices of oil & gas companies like Shell and BP.
The war has also enhanced the prospects of defence-related companies like BAE Systems. These sectors make up a considerable part of the broader stock market, and a lack of exposure within responsible investment funds held back returns.
Meanwhile, sectors that often feature heavily in responsible investment funds, like technology, have suffered. That’s mainly because of inflation and interest rate expectations rising. Investors have been less willing to pay up for companies with high growth potential. Financials also performed poorly overall.
Larger businesses often operate in, or own companies that operate in, areas that fall foul of their exclusions. Responsible investment funds tend to be more focused towards small and medium-sized companies.
Small and medium-sized companies tend to be more sensitive to the health of the economy and concerns about the economy have caused them to fall 13.48%* and 13.38% respectively so far this year. Meanwhile larger companies have risen 2.66%.
This has further hampered the returns of lots of responsible investment funds. Remember, past performance isn’t a guide to the future.
We still believe responsible investment funds have the potential to perform well over the long term. That’s providing investors understand, and are prepared to endure, the inevitable ups and down that come with responsible investing.
As ever, when investing in funds, it’s important to invest with fund managers who have a proven track record of adding value for investors.
The trend towards responsible investment has been one of the strongest the investment industry has seen in decades, and it doesn’t seem to be ending anytime soon. In fact, investing responsibly could be more important than ever.
Governments and companies alike are searching for ways to reduce carbon emissions to have less of a negative impact on the environment and society.
Those left behind could face a media backlash, regulatory issues or even a customer boycott. Ultimately, this could impact their prospects and their prices.
There’s a demographic tailwind too. Millennials (those born between 1981 and 1996) are more interested in sustainability than any generation before them. As their wealth increases over time, they have the potential to reward sustainable companies while punishing those that fall short of what’s expected.
In the US, President Joe Biden passed his flagship economic legislation, known as the Inflation Reduction Act. It includes a $369bn package to help reduce the amount of greenhouse gasses emitted into the atmosphere and reduce the impacts of climate change and the decarbonisation transition on individuals. It also aims to make the US a leader in the clean technology revolution.
Elsewhere, the UN officially recognised that everyone, everywhere, has a human right to live in a clean, healthy and sustainable environment. This is expected to be a catalyst for more ambitious climate action and progress towards environmental justice.
We met with the managers of several responsible investment funds in recent months, including Jamie Jenkins, manager of the CT Responsible Global Equity fund.
Jenkins invests in companies that make a positive contribution to the environment and society. He avoids those with damaging or unsustainable business practices, and that operate in areas some deem unethical, like alcohol, gambling, tobacco and weapons.
He also engages with the companies he invests in, aiming to encourage best practice management of environmental, social and governance (ESG) related issues.
Current investments include Smurfit Kappa. The group is leading the shift from plastic to paper-based packaging, which is mostly renewably sourced, designed to be recycled and naturally biodegradable if littered. It’s also run by a management team that Jenkins believes is committed to sustainability. Please note this fund does not currently feature on the Wealth Shortlist.
Find out more about CT Responsible Global Equity including charges
CT Responsible Global Equity Key Investor Information
We also met Sajiv Vaid and Kris Atkinson, managers of the Fidelity Sustainable MoneyBuilder Income fund. They talked us through some investment process enhancements they’ve been working on. This includes more formalised integration of Environmental, Social and Governance (ESG) analysis and increased levels of engagement. It also excludes companies involved in controversial areas, like weapons, tobacco, thermal coal and gambling. They avoid companies violating the UN Global Compact too – a UN pact on human rights, labour, the environment and anti-corruption.
At least 70% of the fund now invests in bonds issued by companies with sustainable characteristics, as defined by both Fidelity’s proprietary Sustainability Ratings and external ESG scores. The remainder invests in issuers demonstrating improving sustainable characteristics. The managers engage with these companies to agree improvement milestones and timescales.
We expect these changes to enhance an investment process we already held in high regard. For this reason, we’re happy for the fund to remain on the Wealth Shortlist – funds chosen by our analysts for their long-term performance potential.
Find out more about Fidelity Sustainable MoneyBuilder Income including charges
Fidelity Sustainable MoneyBuilder Income Key Investor Information
There are currently six funds in the Responsible Investment sector of the Wealth Shortlist, and several other responsible funds that sit in other sectors. We look at the top and bottom performers below.
Remember, investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, use the links to their online factsheets and key investor information below.
Remember past performance isn’t a guide to the future. Investments and any income they produce can fall as well as rise in value, so you could get back less than you put in.
Looking across all sectors, the Legal & General Future World ESG Developed Index was the best-performing Responsible Investment fund on the Wealth Shortlist over the past year. It aims to track the performance of the Solactive L&G ESG Developed Markets Index, which is made up of more than 1,500 companies based across global developed markets.
The index increases investments in companies that score well on a variety of ESG criteria – from the level of carbon emissions generated, to the number of women on the board and the quality of disclosure on executive pay. It also invests less in companies that score poorly on these measures.
The fund doesn’t invest in persistent violators of the UN Global Compact Principles. It also avoids companies involved in tobacco, controversial weapons (such as cluster munitions, anti-personnel mines and chemical and biological weapons), civilian firearms, thermal coal and oil sands. The fund is also managed to achieve at least a 7% reduction in carbon emissions per year until 2050.
Find out more about Legal & General Future Word ESG Developed Index including charges
Legal & General Future Word ESG Developed Index Key Investor Information
Weaker performers included the Aegon Ethical Equity fund. It invests in UK companies using an ‘exclusions-based’ approach. That means it doesn’t invest in controversial areas from tobacco and alcohol producers to munitions manufacturers and companies that use animal testing.
The fund’s performance has suffered in recent months for many of the reasons we looked at earlier in this article. 44 of the UK’s 100 largest companies are excluded from the fund’s investment universe for ethical reasons. It therefore has a long-term bias towards higher-risk small and medium-sized companies, which underperformed their larger peers.
This, combined with a lack of exposure to the strongly-performing oil & gas and tobacco sectors, hampered returns.
Please note this fund invests in Hargreaves Lansdown plc.
Find out more about Aegon Ethical Equity including charges
Aegon Ethical Equity Key Investor Information
Past performance is not a guide to the future. Source: *Lipper IM, to 31/07/2022. N/A means performance for the period is not available.
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This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
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