Despite a rough start to the year investors are still seeking out ethical funds, data from the UK’s largest investment platform Hargreaves Lansdown (HL) has found.
Sophie Lund-Yates, lead equity researcher at HL, said that investors “have wasted no time in putting their stocks and shares ISAs to work in the early days of the new tax year”, with several ethical portfolios among the most popular options.
Most popular funds and trusts in the first week of the new tax year
Source: Hargreaves Lansdown
Lund-Yates noted a particular interest in renewable energy, with electric car giant Tesla among the most popular stocks recently.
She said investors had been “snapping up” the company with renewed enthusiasm, which “may well be coming from skyrocketing fuel prices” and Tesla’s recent production figures.
“Environmental, social and governance (ESG) momentum is gathering pace too and that’s showing through,” she said.
This trend had a slow start to the year as Trustnet found that only 38 ESG-focused funds made a positive return in 2022’s opening quarter.
The market has moved towards value and cyclical options with a rally in classic value assets, oil, gas and commodities following Russia’ attack on Ukraine, which these funds do not tend to own.
Jason Hollands, managing director of Bestinvest, said: “If you were heavily invested in ESG pariah sectors you’d have had a relatively strong start to 2022.”
“ESG screened funds have had a tough time so far this year, not participating in some of the best performing sectors and also being impacted by the sharp underperformance of growth stocks.”
This was part and parcel of ethical investing, Hollands said, and the recent rut of performance in this sector should remind investors of the more altruistic factors driving ESG funds performance.
“ESG screened funds will deviate significantly from broader markets indices over certain time periods. Sometimes favourably and other times not.”
But, despite the poor performance recently from many ethical funds, the overall trend has continued to draw in investors, as the Investment Association reported that responsible investment funds saw a net retail inflow of £670m in February, £100m more than the IA North America sector “despite challenging market conditions”.
With that, Trustnet asked a variety of experts which portfolios they recommended for a core-ESG allocation.
Gresham House Energy Storage Fund (GRID)
First up was the Gresham House Energy Storage Fund (GRID) trust which fund manager, Megan Brennan, said she held in her own Sarasin Tomorrow’s World Multi-Asset fund.
The recently launched multi-asset fund invests in assets that support the world’s social and economic development and environmental preservation, making GRID an ideal choice.
It invests in businesses dealing in battery storage, an important element to renewable energy production as the surplus power needs to be saved for when solar or wind elements, for example, are not active.
Brennan said: “Battery storage systems represent a cost-effective way of addressing this issue.”
Since it launched in 2018 the GRID trust has been the strongest performer in the IT Renewable Energy Infrastructure sector, making 75.9%.
Performance of fund vs sector since launch
Source: FE Analytics
The recent spike in performance was caused by the rise in energy prices, ultimately created by the war in Ukraine.
FP WHEB Sustainability
Next was a fund which Hollands said had ethical investing at its core. The FP WHEB Sustainability fund is run by WHEB Asset Management, who “may not be a household name, but they are specialists in responsible investing. It is all they do”, Hollands said.
The fund invests in nine seperate themes: environmental services, resource efficiency, water management, sustainable transport, cleaner energy, safety, health, wellbeing and education.
All the companies within these themes provide “solutions to sustainability challenges, not just those with good corporate social responsibility reports”, Hollands said.
Since it launched in 2009 the fund has made a total return of 169.8%, underperforming versus the IA Global sector (283.8%) and the MSCI World benchmark (389.5%).
Royal London Sustainable Leaders
Next are some of the big hitters in the ethical investment space, starting with Royal London Sustainable Leaders trust.
Ryan Hughes, head of AJ Bell’s investment research, said that “with many ESG launches coming to the market, we prefer those that have proven heritage” and Royal London Sustainable Leaders “remained a good choice for ESG exposure within UK equities”.
Indeed, since its launch in the early 1990s the fund has made 1281.4%, well ahead of the IA UK All Companies sector (868.3%).
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Its current manager, Mike Fox, has run the fund since 2003 and in a recent interview with Trustnet the FE fundinfo Alpha Manager addressed Hughes’ point about the wave of ethical funds coming to market,. He said it was irresponsible for existing equity funds to be rebadged as sustainable just to capture inflows.
BNY Mellon Sustainable Global Equity Income
Another well-known option is BNY Mellon Sustainable Global Equity Income, which GDIM’s Tom Sparke chose because it offered something “very different to its peers”.
As mentioned above, ethical funds tend to be run with a growth-bias, but the BNY Mellon fund offered a value-ESG option.
Sparke said: “It has a tilt toward a more value-orientated style of investing and features JP Morgan and PepsiCo amongst the more familiar global fund names like TSMC and Roche.”
He added that this differentiated value focus made it “a good diversifier to sit alongside the growth-focused ESG funds that tend to dominate the sector”.
This set-up has helped the fund minimise its losses at the start of this year, and it is down just 0.36% year-to-date versus the IA Global Equity Income sector’s near 3% loss. Since it launched in mid-2019 it has made 19.9% total returns, just behind the sector (20.9%) and FSTE World benchmark (36.5%).
Legal & General Future World ESG Developed Index
Last up for investors seeking a broader exposure to ESG stocks, Kate Marshall, lead investment analyst at Hargreaves Lansdown, recommended the Legal & General Future World ESG Developed Index.
Tracking the Solactive L&G ESG Developed Markets Index the management team does not “shun the poorer-scorers completely”, she said, preferring to engage with them to improve their rankings and overall business practices.
Performance of fund vs sector since launch
Source: FE Analytics
Since launch it has made higher returns than the IA Global sector, 49% versus 35.9%.
| Name | Sector | Fund Size(m) | Fund Manager | Yield | OCF | IT Net Gearing | IT Pub. NAV Discount | Launch Date |
| BNY Mellon Sustainable Global Equity Income | IA Global Equity Income | £117.50 | Jon Bell, Ilga Haubelt, Paul Flood, Robert Hay | 2.24% | 0.85% | 18/07/2019 | ||
| FP WHEB Sustainability | IA Global | £1,014.60 | Ted Franks, Ty Lee | 0.00% | 1.03% | 03/09/2012 | ||
| Gresham House Energy Storage | IT Renewable Energy Infrastructure | £610.80 | 4.55% | 1.26% | 0.00% | 31.78% | 13/11/2018 | |
| L&G Future World ESG Developed Index | IA Global | £941.80 | Index Fund Management Team | 1.20% | 0.20% | 12/04/2019 | ||
| Royal London Sustainable Leaders Trust | IA UK All Companies | £3,178.70 | Mike Fox, George Crowdy, Sebastien Beguelin | 1.24% | 0.76% | 04/12/2012 |