Ethical Investment Funds

There are two main ways of investing ethically. You can invest directly into projects like wind farms or Fairtrade companies, or you can invest into funds which each hold a variety of shares traded on mainstream stock markets.

This guide is to help decide which ethical investment funds are best for you.

Choosing an ethical investment fund

For this guide we have teamed up with 3D Investing which produces independent rankings of 195 ethical funds in the UK. The Ethical Funds Table above shows the 3D ranking of 22 ethical funds from some of the biggest ethical fund managers in the UK.  More information about how 3D produces their rankings appears below.

Each fund manager will, on average, run three or four slightly different ethical funds. In addition, there are some other ethical fund managers not included in this report. In order to make this guide manageable, we have had to restrict the ones we review but, to get a wider picture, see Practical Investing Issues below.

There are three main questions you should ask about an ethical fund to find the one that is right for you.

1. What are its investment criteria?

Different funds have different negative screens (such as no tobacco or armaments) and positive criteria (such as healthcare or renewable energy) to guide their investment decisions. Once you’ve spotted one or two funds that look interesting, you will want to visit their website or call them to look in detail at their prospectus, because criteria change, funds come and go, and the details are more complex than a table can display.

While you are there, you should look for a full list of fund shareholdings, to see what a fund’s criteria mean in practice. If a fund only lists its top ten shareholdings, and will not provide you with a full list, do not invest there.

This is because some ethical funds will contain shareholdings in what you may think are controversial multinationals – such as BP or GlaxoSmithKline – and you need to be comfortable with where your money is invested.

All our best buys, and companies towards the top of the table, will provide full lists.

2. What is the company behind the fund like?

Even though a company offers an ethical fund, it is likely to run a lot of mainstream funds too. With the exception of WHEB, Triodos and Impax, which are specialist sustainable investors, all the companies in this report do this and will follow the traditional investment mantra of spreading risk across most sectors. Others are, in addition, linked to more complex companies like Lloyds Bank (Scottish Widows) or BMO (Bank of Montreal –  F&C Responsible).

We have rated the wider company groups on our usual Ethical Consumer ranking table above and summarised it with the Ethiscore column in the Funds Table below. For our Ethiscore ranking we have checked their wider shareholdings and, indeed, pretty much the whole table could be filled with marks in every column because of this. What we have done in this case, is to not apply these investment marks where a company has evidenced best practice at stewardship and engagement.

3. What is its financial performance?

We have included 5-year growth, as at 20/3/18, in the Ethical Funds Table using data from the Trust Net website, which also carries lots of other useful information about a huge range of funds. All the funds in this guide are represented in the financial performance ranking except for the Triodos Sustainable Pioneer and the Standard Life Global Equity impact funds, which have not been established long enough yet to have 5 years of performance data.

It should be noted that some ethical funds are designed to produce an income, and others for capital growth. Income focused funds will tend to score worse in a ranking of 5-year growth. 

Practical investing issues

If you’ve got lots of investments to make, or are wanting to use ethical funds in a personal pension or ISA, or just generally find financial information baffling, then it may be worth using an Independent Financial Advisor (IFA). Some IFAs have built up a speciality in ethical investing, and it is almost always worth finding one of these if this is a key part of what you want to do. We have a page on our website called ‘Choosing an IFA’ which is designed to help do this. These IFAs will be able to advise, for example, on whether you might want to look beyond our list here to the wider universe of ethical fund types.

One of the innovations of the last few years is the opening of online fund investment platforms of which there are now many. Indeed, some of our recommended IFAs offer an online investment service (e.g. ethicalmoney.org ) via the Cofunds platform. For those confident enough to invest in this way, it is possible to top up funds at any time, often with quite small amounts (e.g. £50), and to otherwise buy and sell investments there. 

It should also be noted that you can sign up for most ethical funds using a ‘stocks and shares ISA wrapper’ – which always improves performance assuming you have not used up your annual allowance already.

Everyone who works in this space will remind you that, unlike saving in a bank or building society, you do risk losing money by putting it into funds.

Fossil-free ethical funds

In the table below, we highlight nine fossil-free funds, identified through 3D Investing’s fund analysis.

In 2016, we created a longer Product Guide specifically looking at fossil-free ethical funds. To create it, we used an American website called Fossil Free Funds, which analysed thousands of funds around the world. Unfortunately, in 2017, they ran out of funding to enable them to provide ongoing data on European funds too. (It apparently costs around $20,000 per year to subscribe to the key bits of the database which generates the data for Europe).

Until that problem is fixed, we have modified the companies in that report to reflect those on the list in this report. 

Carbon divested funds also gain an additional Product Sustainability mark on our Ethiscore table, above. This is indicated by [C] next to the brand name.

Impact investing

Since we last looked at Ethical Funds in 2014, the idea of ‘impact investing’ has begun to gain a lot of attention in this space. It originally appeared in discussions by philanthropic institutions looking to invest directly into mainly social enterprises. At this point it looked more like the kind of direct ethical investing we discussed in the opening paragraph.

Since then, it has grown to be adopted by the mainstream investment community. Castlefield, one of our recommended ethical IFAs and provider of the Castlefield BEST Income Fund on the table, has described the development of the language thus:

Although we use ‘ethical’ to cover all of these expressions it is useful to know the kind of language you might come across. It is quite common to measure such ‘high-impact’ solutions against the 17 UN Sustainable Development Goals such as ‘ending poverty and hunger’, and ‘improving health and education’. The 3D Star Ranking uses Impact as one of its criteria. This is an emerging ‘science’, and in the words of 3D Investing’s John Fleetwood “the quality of impact measurement varies hugely”.

3D's Ethical Funds Table

On the 3D Ethical Funds table below, we have four columns which identify some of the most popular concerns of Ethical Consumer readers (fossil fuels, banks, animal testing and arms). Data comes from 3D Investing and is not based on criteria but on actual investments held by each fund as at 12/3/18. This is one of the reasons we were attracted by the 3D project, as the ethical fund sector has had a reputational problem with the gap between policy and practice for some years now.

3D's Ethical Funds Table explained

The 3D star rating is based on an assessment of funds in five key areas:

• Quality of sustainability management
• Avoidance of ethical controversy
• Social impact
• Financial performance
• Transparency.

There are 195 funds in the 3D sustainable investment universe covering equities, fixed interest, real estate and infrastructure. These are all registered for sale in the UK and follow some form of sustainability mandate. The top rating is five stars. 3D Investing usually only recommends funds with three stars or more.

Quality of sustainability management

3D quantifies the level of confidence that they have in the fund’s ability to assess and manage Environmental, Social & Corporate Governance (ESG) issues. The star rating for ESG management is determined by the fund managers’ resources available for assessing ESG issues, the quality of the process and the actual outcomes in terms of stock selection.

Avoidance of ethical controversy

The inclusion of some companies in fund portfolios raises significant ethical concerns. Furthermore, there is little point investing in positive solutions whilst, at the same time, investing in companies that are the very source of the problem. 3D has therefore sought to identify stocks that give rise to serious ethical questions and thereby undermine their confidence in the fund and its generic suitability for socially motivated investors.

Areas of controversy include mining, fossil fuels, unscreened finance, intensive agriculture, nuclear power, alcohol, tobacco, armaments, tax avoidance and human rights abuses.

Social impact

Delivering positive social and environmental benefits is a key pillar of 3D Investing. The rating is based on determining the proportion of the portfolio that is invested in companies providing solutions to social and environmental challenges as a core product or service (>50% of turnover).

The starting point is the United Nations Sustainable Development Goals (SDGs), which are an aspirational set of 17 goals with 169 targets covering a broad range of sustainable development issues including ending poverty and hunger, improving health and education, combating climate change, and protecting oceans and forests. 3D has identified those that are most readily applicable to investment portfolios.

A star rating for social impact is derived from the proportion of companies in the portfolio that are solutions based.

Financial performance

The rating looks at the track record of the fund over discrete one-year periods against the average fund in its conventional sector. Some allowance is made for absolute performance, since good relative performance is little comfort to an investor if absolute returns have been poor over a prolonged period.

Transparency

How a fund reports on its impacts and the clarity with which it communicates its sustainability policies is very important. Full justification of every holding and reporting on impact is the Gold Standard for transparency.