Interested in investing but worried about your money supporting dodgy industries and unethical practices?
Ethical investment funds allow you to put your money towards positive social change, so you can invest while also making a difference and staying true to your values. This brand of ethical capitalism has become very popular recently as more people have become concerned with the ethical impact their consumer behaviour has on the world.
So to help all the ethical investors out there, we put together a list of 5 top candidates for ethical investment funds in the UK.
Rounding Up The Top 5 Ethical Investment Funds
These picks have been sourced from Ethical Consumer according to their evaluation criteria for sustainable industries and companies.
Lyxor Green Bond
Lyxor’s “green bond” ETF is composed of investment-grade green credentials bonds, which are fixed-income securities meant solely for financing green infrastructure projects. These index funds have been analysed by the Climate Bonds Initiative for ethical consistency and the fund is indexed to the underlying assets. The Lyxor green bond has an average 8.74% annual return and its growth has nearly tripled in the past year alone. Currently, the total assets under management of the Lyxor fund stand at £461 million.
Lyxor’s green bond fund has seen some incredible growth in the past year alone, signalling a sharp increase in demand for green infrastructure and assets projects. In the past two years, the number of bonds tracked by the fund has multiplied four times to 440, increasing the diversity of the fund.
Lyxor’s fund has a current total expense ratio of 0.25%, very low for an ETF. Since the ETF is composed primarily of bonds, it provides low-risk and low-cost exposure to transparent, liquid assets.
Triodos Pioneer Impact Fund
Triodos Pioneer Impact Fund scores very highly from many publications, including a 16 out of 20 from Ethical Consumer. Triodos’s fund has received a lot of attention for its potent combination of small and mid-cap stocks oriented around ESG impacts. The Pioneer Impact fund has managed a 14.4% all-time annual return average and a 14% 5-year return as of 2021 and managed an incredible 28.8% refund in 2020. Overall, the Pioneer Fund has managed to beat the market by an appreciable margin for the past 5 years straight.
The Pioneer fund is composed of an even mixture of domestic and foreign stocks, with a concentration on US firms and renewable energy. Other represented sectors include sustainable agriculture, social inclusion, sustainable mobility, and innovation initiatives. About 8% of the fund is kept as liquid cash reserves as a hedge against losses. The fund has a total net asset value of €553,717,134 as of April 2021.
Castlefield B.E.S.T. Sustainable Income Fund
Castlefield’s B.E.S.T sustainable income fund is composed mostly of shares of dividend-producing UK companies. The fund is indexed to 4% per year and takes into account investors who want to promote ESG decisions and outcomes through investing. The B.E.S.T. acronym stands for Business and Financial, Environment and Ecological, Social, and Transparency and Governance. The fund uses a screening system to make sure that specific companies adhere to standards and exclude tobacco, arms-producing, and pornography companies.
Additionally, the Castlefield fund was one of the first in the UK to exclude oil, gas, and mining production sectors. The fund has a 5-year 8.5% cumulative performance and has a current fund size of £21.44 million. The largest portion of assets is invested in the financial sector with a sizable minority in industrials and support services. The fund is also ISA available and has a low 0.75% investment advisor fee.
Royal London Sustainable Leaders Trust
The Royal London Sustainable Leaders Trust is built around a large portion of UK small to mid-cap stocks with at least 20% invested in shares overseas. The fund focuses on sustainability as well as efforts in environmental, social, and governance spheres. Currently, the fund has a net asset value of £2.74 billion and a net asset value per share of £263.
The Royal London Sustainable Leaders Trust has a rating of 6 on Royal London’s risk rating metric as the fund has demonstrated high volatility in the past. The fact that over 80% of the equity is dumped into shares suggests that there is significant risk, but also the chance of significant return. The fund has managed an 11.71% 10-year trailing return and has allocations in industries, healthcare, financial services, and technology.
Sarasin Sustainable Global Real Estate Equity Fund
The Sarasin Sustainable Global Real Estate Equity Fund is oriented towards long-term growth through investing in shares of global real estate companies and global real estate investment trust markets. The fund is composed mostly of large and mid-cap companies involved in land development and other land-focussed income projects. So far, the Sarasin fund has managed a 5.77% 10-year return and a 2.69 12-month yield. The fund is mostly made up of shares so it is more volatile than something like the Lyxor Green Bond Fund but real estate values for ETFs are fairly consistent, even given rocky property values in the past year.
What exactly is an Ethical Investment Fund?
Ethical investing is a simple concept at its core. It’s all about investing in line with your moral values and supporting industries that stimulate positive social, economic, and environmental change. Companies that push things like renewable energy, affordable housing, gender equality, and more accessible healthcare might be found in the ethical investor’s portfolio.
Ethical investing is not so much an explicit investment industry methodology, but more of a general attitude towards investing.
It’s about investing in line with a personal moral code. Given the demand for ethical investments, several brokerage firms have put together “ethical investment funds,” which are essentially funds filled with companies that are doing good things.
One of the most common ways that people invest ethically is through Environmental, Social and Governance (ESG) funds. ESG funds are equities that have been selected for emphasis on environmental, social, and governance factors. In other words, ESG funds are made up of a selection of sustainable companies that are pushing for a positive impact in matters of the environment, society, and politics.
For example, there are ESG funds oriented specifically towards efforts to combat climate change, or ones focused on sustainable agriculture in developing economies.
Are Ethical Funds Profitable?
You might think that choosing an ethical fund means that you are sacrificing returns. After all, ethics and profit pull in opposite directions, right?
Sure, investing ethically might ultimately limit your investment selection. However, that does not mean that sustainable companies are necessarily less profitable than other companies.
As ethical investing becomes more popular, sustainable companies and entire industries are rapidly expanding. A recent 2021 Morningstar study found that sustainable equity funds—primarily those oriented around low-carbon economies — outperformed traditional equity funds in every financial quarter of 2020.
In other words, ESG funds tend to be quality growth funds. When broken down by category and industry, ESG factors funds consistently performed in the top half of all funds and large-cap sustainable investing funds managed to outperform the S&P 500 index.
So overall, it seems that ethical investing is just as profitable, if not more profitable. Ethical investing also has a feedback effect. The more demand grows for companies that engage in sustainable practices, the more value those companies will have and the more they will grow. So to answer the main question in short: ethical funds are profitable and can be a critical part of a strong responsible investment portfolio.
What to Look for in an Ethical Investment Fund
There are no set criteria that you should look for in an ethical investment fund, only that it fits your ethical values. That being said, ESG criteria funds with investment managers that are oriented around certain sectors are a better option than others.
For example, ESGs that incorporate renewable energy have performed extremely well in recent years as there is a global push for alternative energy sources. Wind, solar, and hydroelectricity are all viable opportunities for ethical investing.
Organic agriculture is also an up-and-coming sector. Sustainable farming practices will be very important in the future economy as a response to climate change and these industries have already built firm infrastructure in the areas of terrestrial agriculture and sustainable fishing.
Most importantly, an ethical and responsible investment fund should match your values and contribute to positive social, environmental, economic outcomes. That doesn’t mean you also cannot profit from those investments either.
Also, look for fund managers and see what kind of reputation the fund manager or fund managers have. A good fund manager can make a real difference.
Ethical investing is the wave of the future and a way to make a real difference. You can get a good financial return from investing in things like clean energy, and UK ethical investing is growing rapidly. There is no better time for sustainable funds for private investors. Companies focused on socially responsible investment decisions can help UK investors wanting to make a difference in the world.
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