Did ethical investments deliver better results than traditional choices in the last decade?

Ethical investing has changed the stocks and shares landscape in the past few years, becoming popular with investors of all kinds.

These funds allow investors to put their money into causes that represent their personal values, with the included companies seeking to create wider positive social change through their business.

As a result, ethical investments have boomed into a multi-billion-pound industry. In fact, their popularity has grown to such an extent that they’ve started to seriously challenge traditional options for returns.

Environmental, social and governance concerns at heart

When designing ethical portfolios, fund managers select stocks based on a set of criteria that the companies they invest in must meet. Typically, companies fall into at least one of three categories for good ethical behaviour: environmental, social, and governance.

Environmental factors involve tackling climate change and improving sustainability. This is a varied category, from companies that build “green” infrastructure, such as wind turbines or solar panels, to those that produce sustainable packaging. It can also include companies that seek to change their own environmental behaviour by reducing their carbon emissions.

Social factors mean keeping socially ethical practices in business operations. Issues can include anything from good conditions for workers to excluding companies that are considered socially negative, such as gambling companies or tobacco producers.

Governance involves the behaviour of companies at the corporate and executive level. This can be anything from inclusion of minority groups in the boardroom, to issues such as working actively to tackle bribery and corruption.

These three categories have become synonymous with ethical investing, so much so that you may hear it referred to as “ESG investing”.

Ethical investments have outperformed traditional choices in recent times

Ethical investments have become so popular that many investors no longer consider them as an inferior choice.

In the first three months of 2020, Morningstar found that £27 billion was invested in ethical funds, even as the stock market began to dip at the hands of the coronavirus pandemic. Meanwhile, investors withdrew £133 billion from the more traditional choices.

These figures are not specific to this year either; they’re the culmination of years of outperformance.

Consider this comparison of two ethical indexes versus the FTSE100 and the FTSE All Share:

Source: Which?

The Morningstar UK Sustainability Index, an objective rating of how 20,000 funds meet ethical criteria, is the highest performing index. The FTSE4Good UK, the FT’s equivalent sustainable index, is just below it. Meanwhile, the FTSE 100 and the FTSE All-Share both lag slightly behind.

The raw data suggests that they’ve started to outperform their traditional counterparts, too.

According to figures published in the Guardian, sustainable funds invested in large global companies returned 6.9% per year for the past ten years. Meanwhile, traditionally invested funds returned 6.3% per year.

These margins may be small, but these figures prove that ethical investments can perform just as well as, if not better than, traditional choices.

Many pension providers now offer green funds

If the idea of entirely adjusting your investment portfolio to more ethical choices is too radical, you could choose to do it passively through your pension instead.

Nest, the UK’s largest pension scheme with over nine million members, now actively divests from carbon heavy investments. They also allow you to choose an exclusively ethical fund for your retirement pot.

Changing your pension to a green option could be a good choice if you’d prefer a more passive approach to ethical investing. Check with your provider to see if they offer an alternative ethical fund.

If you do decide you want to make a change to your pension, make sure you seek professional advice first. At Douglas White, we can advise you based on your specific pension arrangements to ensure any changes you make are appropriate for your circumstances.

Beware greenwashing on ethical portfolios

One difficulty with ethical investments is that some companies have been accused of “greenwashing”, namely masquerading as ethical to receive investment.

Shell is one such company. As a fossil fuel producer, Shell is one of the biggest contributors to total global carbon emissions and, as a result, is considered one of the world’s biggest polluters.

But, while Shell’s position may seem unethical from an environmental perspective, they also have a corporate promise to reduce their net carbon output to zero by 2050. This means many high-profile funds include Shell as an environmentally conscious and ethical company.

Companies that appear ethical can also be dropped from funds if their behaviour stops meeting the criteria.

Many managers used to include online retailer boohoo for strong social behaviour in its supply chain and for its strong governance. However, an investigation by The Sunday Times revealed that a factory producing boohoo clothing had been engaging in unethical activity.

From paying workers less than minimum wage to ignoring Covid-19 safety protocols, boohoo’s production line was violating the criteria that fund managers set for companies to be included – the opposite of having strong social values and governance.

Many managers have now dropped boohoo from their funds, but its initial inclusion demonstrates the potential for fallibility in the way managers select their investments.

If your concerns are more based around performance, this may not be an issue for you at all. However, if you’re investing because you want your money to enact positive change, you may need to check the investments in certain funds to be sure they do fit with your values.

Can sustainability continue to grow?

With strong performance underpinning many sustainable funds, there’s no reason why ethical investing can’t continue to grow at a similar rate. Of course, this doesn’t mean that traditional fund choices won’t beat ethical funds in the coming year.

And remember, past performance is not an indicator of future performance. While it’s true that the funds are in a particularly rich vein of form, you’re never guaranteed a return on any investment. It’s always best to seek personalised financial advice if you plan on adding anything new to your portfolio.

Get in touch with us

If you’d like to know more about ethical investing, please contact us at Douglas White.

We have a range of ethical portfolios for you to invest in, each with a track record of more than five years.

Email info@douglaswhiteltd.com or call 0151 345 6828 to find out more about how ethical investing could impact your portfolio.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.