Environmental funds: investing that's good for the planet

18 September 2019

How do you fancy an investment that not only makes you money but also makes a positive contribution to the world?

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Climate change, water quality, alternative energy sources, pollution and sustainable development have all become hot topics in recent years.

Just think how many discussions we have about everything from plastic clogging up our rivers and oceans to the rise of electric cars.  Eco-friendliness has entered the mainstream.

More than £19 billion is invested in UK green and ethical funds – an increase of £3 billion in three years, according to data compiled by the EIRIS Foundation, an organisation that provides information about ethical investing.

This suggests a growing consumer interest for investments that take a range of environmental issues into account – and it is a trend that is expected to continue.

Environmental investing comes under the broader socially responsible investing (SRI) umbrella, which is also enjoying a spike in interest.

In fact, the UK market for SRI investing should grow by a staggering 173% to reach £48 billion by 2027, according to a study by Triodos Bank.

Bevis Watts, managing director of Triodos Bank UK, emphasises how everything we do has a consequence.

“Investors are waking up to the fact there is no such thing as a neutral investment,” he says.

Furthermore, investing ethically may boost your returns. Rebecca O’Keeffe, head of investment at interactive investor, says: “Far from compromising investment performance, there is a growing body of evidence that suggests that companies with good environmental, social and governance practices should be expected to outperform their less ethical counterparts, especially as interest in sustainability and environmental issues grows.”

So, how can you get involved? That’s largely dependent on your investment knowledge and attitude to risk.

Firstly, you can buy shares in companies whose products help the environment, such as a new way to purify water or provide cleaner energy.

Alternatively, you can opt for an investment fund whose manager will buy an array of stocks making a positive impact on the world.

Then there are funds with a similar objective, but approach it from the opposite way by screening out companies that potentially damage the environment or engage in unethical practices.

Let’s look at each in turn. With individual shares, the challenge is finding the winners – and avoiding the losers – according to financial adviser Martin Bamford, managing director of Informed Choice.

“There’s a huge research and development cost associated with creating the next generation of solutions to address environmental challenges, which can make profits in this theme elusive and only apparent over the very long term,” he says.

He recommends choosing a suitable investment fund and leaving the decision making to a specialist manager.

The good news is there are many funds available, says Laith Khalaf, a senior analyst at Hargreaves Lansdown.

However, you should bear in mind that the nature of these funds can make them more focused than traditional equity portfolios.

“There are a number of funds out there that seek to invest in companies that are having a positive effect on the environment or society,” he says.

One possibility is the M&G Positive Impact fund. It invests in companies that are addressing the world’s most pressing challenges. These include saving lives, social inclusion, climate action, and better working conditions.

Its manager, John William Olsen, invests in three categories of positive impact companies: pioneers, enablers and leaders.

Pioneers are those who have a transformational effect on society or the environment, while enablers provide the tools for others to do this.

Leaders, meanwhile, spearhead the development of impact and sustainability in their industries. Investing in these categories provides decent diversification.

Mr Khalaf also highlights traditional ethical funds. “These look to exclude from their portfolio companies that engage in activities deemed harmful to the environment or society,” he adds.

This is a slightly broader approach.

“It allows investment in companies that aren’t necessarily doing something positive, but are going about their business in a responsible manner that isn’t doing harm,” he says.

He cites Kames Ethical Equity as an example. This fund, run by Audrey Ryan, invests in companies that meet its predefined ethical criteria, avoiding those it deems harmful to people, society, animals or the environment.

Ryan Lightfoot-Brown, Fundcalibre’s senior research analyst, suggests that investors pay close attention to a company’s environmental criteria.

“There are many different funds and ways of looking at the environment, so investors need to make sure their views are aligned to the fund’s strategy,” he says.

He also warns that investors need to consider that returns could be volatile.

“Funds may underperform if sectors like oil and gas, in which they are unlikely to invest, do well,” he adds. “However, even companies like BP are having to think about renewables.”  

Stewart Investors Worldwide Sustainability Fund  

The aim of this fund is to grow your money by investing in companies that benefit from – or contribute to – the sustainable development of different countries.

It can invest in both developed and emerging market countries, while decisions around sustainability are based on three key points.

The first is identifying companies that manage sustainability risks and opportunities, as well as those with a positive sustainability impact.

The second is including environmental, social and corporate governance matters in research, while the third is engaging directly with companies on sustainability issues.

The fund currently invests in just under 50 companies, with the largest 10 accounting for around 40% of the fund.

It also embraces diversification by investing across a broad range of sectors and geographical regions.

Europe and the Middle East has the largest regional allocation at 39.3%, followed by North America with 19.7% and Japan with 10.7%.

As far as sectors are concerned, consumer goods has the lion’s share with 36%, followed by healthcare with 25.3% and technology with 14.3%.

This is a fund that certainly seems to be doing well, according to Martin Bamford, managing director at advice firm Informed Choice.

“It has a good global spread and focuses on companies that are positioned to benefit from the sustainable development of countries,” he says.

STEWART INVESTORS WORLDWIDE SUSTAINABILITY FUND
Launch date   1st November 2012
Fund size  £400.2 million
Minimum initial investment £1,000 - or £50 a month
Minimum additional investment £500
Initial charge 0%
Ongoing charge 0.90%
Annual management fee 1.50%
Contact details for retail investors 0131 473 2900

Value of £100 invested in the fund over five years*

Year 2014 2015 2016 2017 2018
Fund Movement in year (%) 7.16 6.15 27.55 14.46 0.51
Value of £100 107.16 113.75 145.08 166.07 166.91

*The £100 was invested on 1 January 2014

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