personal finance

UK ethical funds surge in popularity


Assets held in ethical funds have more than trebled over the past decade as UK investors pour money into green and socially responsible companies.

According to figures from Hargreaves Lansdown, the fund broker, money held in ethical funds has risen from £4.5bn in 2008 to £16.7bn today as sales increase.

More than £600m from individual investors flowed into ethical funds in the first half of 2018, according to the Investment Association, the UK asset management trade body. In 2008, about £180m was placed into the funds over the year.

The boom in ethical funds follows a string of high-profile governance failures, ranging from the Volkswagen emissions scandal to a series of rows at FTSE 100 companies over high executive pay.

Meanwhile, large institutional investors are coming under increasing pressure to scrutinise more closely the companies they invest in and in some cases to dispose of holdings.

Senior investment officers at Cambridge university’s main endowment fund recently stepped down from roles amid growing pressure from staff and students to dump investments in fossil fuels.

This summer, Ireland’s sovereign wealth fund became the first in the world to divest from fossil fuels after a bill was passed in the country’s lower house of parliament requiring it to sell its holdings. Similarly, Norway’s sovereign wealth fund has recently made moves to reduce its coal exposure.

Laith Khalaf, senior analyst at Hargreaves, said there were signs that ethical investing was “finally gaining traction with UK investors”, and that a poor record on environmental and social issues was “now widely seen as a red flag by investors from a risk perspective, as well as an ethical one”.

Adrian Lowcock, head of personal investing at Willis Owen, the fund broker, said investors had been drawn to the funds as they realised there was not “a trade-off between returns and principles”.

Mr Lowcock said that ethical funds, which largely avoid buying shares in oil and mining companies, has protected investors from falls in those sectors. “Ethical funds have also benefited from the outperformance of smaller and mid-sized companies. [They] usually have a bias away from large companies.”

Ethical passive funds, which track indices, have also taken off. According to the London Stock Exchange, a record number of exchange traded funds with environmental or social goals have listed on the LSE over the year to date.

A recent YouGov poll reported that millennial savers are twice as likely as older generations to want their pension to be invested responsibly.

According to the research conducted last year, 13 per cent of pension savers under the age of 34 would like their money invested ethically, compared with 6 per cent of those aged between 45 and 54, and 7 per cent of over-55s.

However, investment managers have warned that funds with “ethical” strategies range from those that fully exclude mining stocks to those that simply invest in the least environmentally harmful. Others exclude alcohol and gambling companies alongside weapons manufacturers.

Several online wealth managers meanwhile argue that the narrow range of ethical funds available means that creating a diversified investment portfolio is difficult.

IG, Moneyfarm and Scalable Capital, which is backed by US asset manager BlackRock, all say they are unable to put together ethical portfolio options.

Nutmeg, the UK’s largest robo-adviser, has argued that because different asset managers interpreted “ethical” in different ways, they could not construct an ethical portfolio that would please customers.

Ethical funds can also be difficult to access for pension savers, with many company schemes offering only a narrow range of ethical funds.



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