The rise of sustainable and ethical investing has been one of the main investment themes of the past few years and 2022 was no different, but with so many options out there it can be difficult to know where to start.
Environmental, social and governance (ESG) is the buzz term used by the finance industry to capture those that want to do good with their money. Within this bucket, however, there is an eclectic mix of assets and multitude of different styles and approaches.
This is not helped either by the fact that there is no clear consistency between investment houses as to how they define sustainability, how they implement their controls and how they measure success for their sustainable goals.
Gabriella Macari, chartered wealth manager at TILLIT: “Sustainability is a subjective, and sometimes emotive, topic, and it can be difficult to understand how to achieve your personal goals. Then there is the issue of greenwashing [funds that claim to be ESG, but are not].”
Yet it is clearly an area of the market that is blossoming. The lastest Calastone report on fund flows described ESG investing as a “a bright spot in a gloomy sky” in 2022, as equity funds with a sustainable mandate were “by far the most resilient sector of the year”. With inflows at $8.2bn, they were in sharp contrast with non-ESG funds, which experienced $21.5bn of outflows over the 12-month period.
Macari said that an investor looking to incorporate sustainability in their portfolio, should try not to do everything at once.” Perhaps look to add one or two sustainable funds at the outset and then gradually increase your weighting to sustainable funds,” she suggested.
Below, five experts give investors more guidance as they share their ESG “perfect pairing”, or the two funds that they expect will work well together to boost returns.
We start with Macari, who chose Future World from the sustainability specialist asset manager boutique Alquity, and Trojan Ethical.
Future World invests primarily in emerging markets, with a small portion in frontier markets, making it one to potentially consider for something that pushes the boundaries of Impact investing in emerging markets.
“Not only is it rare to find sustainable funds investing in emerging markets, but Alquity also donates 10% of its revenues to the 'Alquity Transforming Lives Foundation' which focuses on lifting people out of poverty in emerging markets,” Macari said.
“The fund managers look for companies that have at least one of the following: a sustainable competitive advantage, cyclical tailwinds, or monetisable structural growth. There is a preference for domestic, growth-focused companies rather than exporters.”
Trojan Ethical meanwhile is a concentrated multi-asset fund focused on capital preservation with an ethical overlay. It invests in developed markets equities (focused on quality), developed market government bonds, gold (via physically backed Exchange Traded Commodities) and cash.
“There is no fixed asset allocation, instead, the exposure to any single area is based on the manager’s top-down views. Compared to other multi-asset funds, it is particularly concentrated, especially on the equity side. Despite this, the fund has a track record of being resilient through periods of market turmoil,” said Macari.
“This could be an option for someone looking for a more conservative investment option but who still wants to invest sustainably. In addition, Trojan Ethical invests predominantly in developed markets and when combined with a growth-focused impact fund like Alquity Future World, which invests in higher-risk regions such as emerging markets, it can create a more balanced approach to sustainable investing,” she concluded.
Andrew O’Shea, investment director and head of fund solutions at Pharon Independent Financial Advisers, picked Janus Henderson Global Sustainable Equity as his starting point, which he then complemented with Rathbone Ethical Bond.
“Both of these funds have outperformed their respective Investment Association peer groups with a good level of consistency,” said O’Shea.
The former has provided an annualised 10-year return of 13.4% compared to the IA Global sector return of 9.7%, while the latter has returned 3.6% compared to the IA Sterling Corporate Bond sector return of 2.3%.
The Henderson fund invests in between 50 and 70 global companies that have to fit into one of 10 sustainability themes – five environmental and five social – which in turn provide solutions to one of four identified megatrends: resource constraints, climate change, populations growth and an ageing population.
O’Shea said: “Sustainability is the thread that runs through the investment process, not only through the thematic approach, but also in the careful consideration of the sustainability of business models, cash flows, and reinvestment opportunities, together with checks and balances around company executives.”
On the other hand, Bryn Jones’ fund is built around the team’s understanding of the economic environment and what industries will prosper in the current cycle and financial analysis of constituents in the expected winning sectors.
A shortlist is then submitted to Rathbone’s Greenbank for analysis of the ethical nature of the bonds against both positive and negative social and environmental criteria and returned to the investment team for final selection.
Tom Sparke, investment manager and director at GDIM, chose Wellington Global Stewards and BlackRock Sustainable Strategic Bond.
“This combination, split evenly, would have provided investors with a return above 40% over the past four years,” he said.
“The Wellington fund takes a highly pro-active approach to ESG equity investing and uses strong financial and sustainable metrics to identify a collection of companies that make up its concise portfolio.”
Currently standing at just below 40 stocks, the fund contains global giants such as Microsoft and TSMC but also holds less ubiquitous names such as Industria De Disneo Textil SA (Inditex) and Home Depot.
The BlackRock fund has outperformed its sector benchmark over one, three and five years on a total return basis and provides investors “a good level of yield, currently above 3.5%, through a portfolio of high-quality holdings which is actively managed”.
Playing with the growth/value divide, Rob Morgan, chief analyst at Charles Stanley selected Baillie Gifford Positive Change for its distinct bias to more expensive growth-orientated stocks and, to balance it off, the more value-conscious Edentree Responsible and Sustainable Global Equity.
“The Baillie Gifford fund is one example of a large number of funds labelled ethical or sustainable that invest mainly in higher growth areas,” he said.
“One exception to this is Edentree’s fund, a long-standing ethical fund with a stable team, which has in the past exhibited some strong returns versus its global equity benchmark and peers.”
However, it has struggled at times due to being less growth-focused, as well as an underweight to the dominant US market, noted the analyst. Unlike other more value-conscious funds it has also missed out on the outperformance of energy stocks over the past year, so returns have been lacklustre.
“However, as a partner for a more aggressive, growth-orientated strategy such as Baillie Gifford Positive Change it is a decent option.”
