Turbulence and tailwinds: how savers can seek returns and save the planet

Isa season is upon us. With just a few weeks left to go before the end of the 2018/19 tax year, canny savers are scrambling to use up their tax-free allowance before the 6 April deadline.

The task became more of a challenge this year after the government, in a bid to bolster Britain’s savings culture, decided to increase the amount of savings left out of the taxman’s reach to £20,000, up from £15,240.

This greater scope for investment means that many investors will be seeking new avenues to diversify their portfolios in order to ensure decent returns in these turbulent times.

But those who worry about the way of the world can seek some solace by choosing to invest a portion of their expanded allowance in funds that meet environmental, social and governance (ESG) criteria.

Falling under the umbrella term “ethical investments”, the United Nations Principles for Responsible Investment defines ESG investing as an approach that aims to better manage risk and generate sustainable, long-term returns.

At the very least, this means that businesses deemed investment-worthy for ESG funds will have to meet several criteria to say, not damage health or contribute to conflict – effectively barring the tobacco and arms industries from consideration.

Admittedly, savers who take a purist approach and invest all their money in an ESG portfolio remain thin on the ground. “The sector continues to attract interest, but is still something of a niche,” explains Robert Ayley, a partner at St James’s Place. “Of the clients I look after, just one actually invests in an ethical portfolio – that’s less than one per cent of my clients.”

Despite this, Ayley says St James’s Place still recognises that there is a “substantial market” for ethical investing, with the wealth management firm offering Isas and pensions built upon ESG criteria.

For those who take a hands on approach to building their portfolios, and would like to diversify into ESG without putting all of their eggs in one basket, there are numerous funds available to purchase via online trading platforms and brokerage firms.

The top three ethical investment funds bought via Hargreaves Lansdown over the past year were Baillie Gifford Positive Change, Kames Ethical Equity Fund, and Royal London Sustainable World. Just like regular non-ESG funds, each will have its own strengths and weaknesses that you need to weigh up before you buy.

“ESG has climbed up the priority list for many companies and professional investors,” explains Laith Khalaf, senior analyst at Hargreaves Lansdown. “Ethical investors need to be prepared for periods of underperformance though, when the areas of the market that they aren’t invested in go on a winning streak.”

But unlike regular funds, where returns are the priority, those who put ethical considerations high on their investment agenda may be compelled to dig a little deeper into the composition of each ESG fund. This is because, despite the UN definition of ESG being broadly accepted, the way it is applied to investment strategies is still open to individual interpretation.

As Khalaf points out: “Ethical investors need to do a bit of homework to make sure that their chosen fund meets their own ethical standards, as well as having long-term performance potential.”

For some though, investing along the broad ESG principle of “do no harm” is not enough. In this case, investors should turn to socially responsible investing (SRI). Rather than simply trying to mitigate harms, this sub-category aims to invest money in companies proactively seeking to provide tangible social benefits.

A leading provider of SRI funds is the ethical investment firm Triodos Bank. A survey undertaken by the bank found that just under a fifth of UK investors are planning to put their money into socially responsible funds in coming years, rising to almost half of investors aged 18-34.

The survey also predicted that the market itself will grow by 173 per cent to reach £48bn by 2027.

Every investment affects the planet in one way or another, and more of us clearly want to make sure that the impact is positive.

ESG funds breakdown

(Figures provided by HL)

Baillie Gifford Positive Change
One year performance: 10.7 per cent
Five year performance: N/A

Founded in 2017, this fund runs a concentrated portfolio of companies who make a positive contribution the world, which also have strong financials. The vast majority of the fund is currently invested overseas, and since its launch two years ago, performance has been strong, though it’s still early days.

Kames Ethical Equity Fund
One year performance: – 6.7 per cent
Five year performance: 19.7 per cent

Sitting on the Hargreaves Lansdown Wealth 50 list of favourite funds, it has been managed by Audrey Ryan since 1999. The fund invests in the UK, which is out of favour because of Brexit, hampering recent performance.

Ethical considerations mean 69 per cent of the UK’s largest companies are excluded from the fund, meaning greater exposure to SMEs.

Royal London Sustainable World
One year performance: 5.09 per cent
Five year performance: 74.4 per cent

This fund invests in a mix of shares and bonds on the proviso that the companies in question meet the fund’s ethical criteria.

Holdings in tech giants Microsoft, Amazon and Alphabet have helped boost performance in recent years.

SRI Funds breakdown

(Figures provided by Triodos)

Triodos Pioneer Fund
One year performance: – 4.3 per cent
Five year performance: 51.9 per cent

The main focus of this fund is on small and medium-sized companies like Yamaha and DS Smith that are delivering pioneering solutions to sustainability challenges. The voting rights associated with its shareholdings are exercised to ensure that decisions around financial profit are never made at the expense of people or the planet.

Triodos Sustainable Equity Fund
One year performance: 1.8 per cent
Five year performance: 62.4 per cent

This fund includes a range of large stock market-listed companies like Philips, Bridgestone and Japan National Railway that are working towards a more sustainable future. The largest geographical exposure is the US at 36.9 per cent of investment.