Consumers have embraced green technology as part of everyday life. There are almost one million electric cars on Britain’s roads while 35,000 households had a heat pump installed last year, according to the industry body MCS.
Lifestyle changes are one way of putting your money where your principles are, but for those who also want to take a step into ethical investing, there are plenty of options.
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Investing ethically can be every bit as good for the environment as cutting back your waste or taking fewer flights. It is also possible to be principled and profitable, with companies in the renewable energy, battery technology, recycling and waste management sectors all experiencing growth.
And invest through a stocks and shares Isa and you will be as tax-efficient as you are green.
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The MSCI ESG Leaders index, which focuses on those companies with the strongest environmental, social and governance scores, has outpaced the MSCI World index by an average of 0.6 per cent every year for the past five years. If the MSCI World ESG Leaders grows at the same annual return as it has over the past five years for the next 10 years (12.59 per cent), a £10,000 investment would grow into £34,989. The MSCI World index, which grew at 11.95 per cent, would give you £32,840.
So savers need not choose between their conscience or returns.
But green investing is not without volatility. Last year was tough for some ethical sectors, particularly renewable energy groups which struggled with rising prices, forcing them to shelve infrastructure projects.
Jason Hollands, a managing director at the wealth manager Evelyn Partners, said: “Performance has suffered as shares of oil and gas companies soared in 2021. In fact, energy was the best performing equity sector globally in the three years to the end of 2023, so funds that did not invest in fossil fuels missed those gains.
“It is worth noting that another out-of-bound sector for ethical funds — the defence industry — has also been on a tear over the last two years as the war in Ukraine and rising concerns about China’s belligerence towards Taiwan have seen governments bolster their defence spending.”
Avoiding unethical stocks
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The language of ESG — environmental, social and governance — can be daunting. But there are three main approaches to ethical investment: exclusion, engagement and impact.
Investors who simply want to make sure that they don’t invest in unethical areas such as tobacco, weaponry or fossil fuels should take an exclusionary approach.
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Emma-Lou Montgomery from the investment manager Fidelity International said: “The most important step is to ask yourself: what are your personal values, which sectors and companies are you happy to invest in and which do you want to avoid?”
More platforms are offering tools to help investors to navigate sustainable investment — allowing them to include, exclude or avoid issues, industries and areas that they feel strongly against.
Backing firms so you can change them
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Others prefer a more active approach. Melissa Scaramellini, a fund research analyst at the wealth manager Quilter Cheviot, said engagement can be more powerful than exclusion for changing corporate behaviour.
She said: “A question to consider is whether merely abstaining from investing in parts of the market really changes anything — or will the shares just be bought by someone who does not vote or engage with the company on its negative impacts?
“Rather than just avoiding these sectors, we think it can have more of an impact to invest with a fund manager that uses its voting and engagement to push hard for action on environment and social issues.”
Scaramellini said that companies such as Legal & General Investment Management and Aviva were blazing a trail in this type of investment and pressing hard for change. If companies do not respond to their prompts to make change, they take them out of their funds.
Backing firms that are bringing about change
Another option is to invest in companies that are actively making a difference to the environment or society. “This could mean investing in funds focused on finding companies that are solving environmental or social problems, or which prioritise sustainability,” said Scaramellini. If a company is solving a big problem, by definition it has a big market for growth.
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Hollands suggests the M&G Positive Impact fund, which backs companies tackling social and environmental challenges. He said: “Key themes in the portfolio include delivering better healthcare, education, environmental solutions, social inclusion, climate action. The fund analyses its performance against sustainable development goals and produces an annual impact report, so that investors can keep track.”
Montgomery and Hollands both recommended the specialist group, Brown Advisory.
“The Brown Advisory US Sustainable Growth fund focuses on large companies that have steady growth which can be sustained, rather than rapid growth that will burn out. Its top ten holdings include big names such as Nvidia, Microsoft and Amazon,” said Montgomery. Hollands likes the Brown Advisory Global Leaders Sustainable fund, which looks beyond the US.
There are also more specialist options. If you want to focus on the theme of global targets for net zero, Hollands suggested the Ninety One Global Environment fund, which targets companies providing solutions to cut carbon emissions.
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Montgomery likes the Stewart Investors Asia Pacific Leaders Sustainability fund, which has top ten holdings in India, Japan, Singapore and Australia.
Lower risk investors could consider an ethical cash Isa, such as those offered by Triodos or Coventry Building Society. These companies say they will only lend to businesses that meet rigorous social and environmental criteria.
