Why the rise of responsible investing makes it more affordable

Writer,

Making sustainable choices in your everyday life isn’t always cheap. An electric car costs more than one with a combustion engine. Going vegan can mean going to the speciality aisle and paying a bit more for your dairy-free chocolate.

The above examples are driven largely by supply and demand dynamics. Because these products are more niche in nature, their product costs are higher – which is passed on to the consumer. This works both ways, however. For example, solar panels used to be very expensive, but thanks to their increasing use are now more affordable. (Plus they can often lead to cheaper electricity costs compared to traditional power sources.)

The exact same can be said about responsible investing. Taking a responsible approach used to mean paying significantly more in fees. Why? Because gauging a company’s responsible credentials can involve expensive additional research, and significant data needs. You also need extra staff to engage with companies to ensure they’re doing the right things – such as voting positively on green issues and taking topics such as board diversity seriously. Most of these costs are fixed in nature, costing the same regardless of the size of investment. And they’re passed onto investors by the management fee charged by the fund manager.

However, unlike the fixed nature of costs associated with servicing a responsible approach to investing, the fee a fund manager receives varies depending on the amount they manage. To illustrate this, let’s suppose a fund manager charges a fee of 1%. If they manage £10 million, that’s an annual revenue stream of £100k. But if they manage £1 billion, the revenue stream is a much larger £10m. So as a fund grows, the manager is often able to cut the fee they charge, to account for the larger pool of money they manage.

If we look at the market for Exchange Traded funds (ETFs) which is a type of investment we largely use in the Responsible Growth fund, we saw a tipping point in the first half of 2021. ETFs are an investment fund which is traded on stock exchanges such as the FTSE 100 or even specific stock sectors, currencies or commodities. According to Trackinsight, flows into ESG strategies (those that incorporate environmental, social and governance issues) in the European market were equivalent to flows into non-ESG strategies. Although the rest of the world is a little bit behind, almost a sixth of global flows were into ESG strategies.

Source: Trackinsight

This isn’t a one-off occurrence. With ESG ETFs passing $300bn, inflows have accelerated in the last couple of years.

Source: Trackinsight

When we launched the VT AJ Bell Responsible Growth Fund in November 2020, we capped the ongoing charges (OCF) at 1%. This was higher than our other funds to account for the steeper investment costs of using responsible strategies, alongside other fixed costs we faced. The following graph shows how these charges have fallen significantly over the eight months since the fund launched:

Source: Valu-Trac

By the end of July 2021, the ongoing charge was down to 0.47%, under half the level at launch, a premium of around 0.15% compared to our other growth-orientated funds. This means investing responsibly no longer needs to cost the earth, both literally and metaphorically!

We’ve previously covered how investing in our responsible fund can lower your carbon footprint, as well as help you avoid certain sin stocks. But as a reminder, compared to the VT AJ Bell Adventurous fund, the VT AJ Bell Responsible Growth fund (according to MSCI data):

  • Has a 65% lower carbon intensity
  • Has no exposure to companies deemed to be involved in controversies (compared to 2.9% for the Adventurous fund)
  • Has 90% lower exposure to companies with fossil fuel reserves
  • Has minimal exposure to industries such as tobacco, weapons and adult entertainment

As the fund has yet to go through its first anniversary, we won’t focus on performance, but we can say we’re pleased to see it delivering as expected. So if you care about people and the planet, but still hope to make a profit, you may want to take a look at the VT AJ Bell Responsible Growth fund.

AJ Bell Responsible Growth fund

Invest for people, the planet and profit

Learn more

Important information: The value of your investments can go down as well as up and you may get back less than you originally invested. These articles are for information purposes only and are not a personal recommendation or advice. If you’re unsure please consult a suitably qualified financial adviser.


ajbell_matt_brennan's picture
Written by:
Matt Brennan

Matt Brennan is Head of Passive Portfolios at AJ Bell and is responsible for the day-to-day running of the AJ Bell funds. He has over six years’ experience in financial services, having previously worked at Brown Shipley as a Senior Fund Manager and Head of Fixed Income Research, with specific responsibility for managing a discretionary fixed income fund. He also formed part of a four-person fund management team that ran the company’s multi-asset funds. Matt graduated from the University of York with a first class Masters degree in Mathematics, and is a CFA Charter holder.