We pick a mixture of active and passive funds, investment trusts and ETFs to play the ESG theme
Thursday 27 Jun 2019 Author: Daniel Coatsworth

There are now a multitude of investments offering exposure to ESG themes as investors seek to benefit from environmental, social and governance strategies. Having researched the space for our two-part series on ESG investing, we’ve pulled together a portfolio of active and passive funds  which specialise in certain areas or give you broad exposure to the ESG universe.

You can either buy all of the funds, choose between the active or passive ones, or cherry pick one or two funds to sit alongside other investments you may already have in this space.


ACTIVELY-MANAGED FUNDS

ENVIRONMENTAL

Impax Environmental Markets (IEM)

Launched over 17 years ago, the fund was one of the first to offer retail investors the chance to benefit from growth in the markets for cleaner or more efficient delivery of energy, water and waste services.

Part of the fund invests in companies which mitigate issues such as climate change, including renewable energy and energy efficiency stocks.

Another part of the fund invests in companies which  enable people to adapt to environmental challenges, such as water infrastructure and ‘smart’ power grids.

Its share price has doubled over the past five years. 

 

SOCIAL

BMO Responsible UK Income (B4NKFT8)

Run along strict ethical guidelines, the fact that BMO looks beyond financial gains to focus on community benefits and more when measuring performance is an important point to make for potential investors.

An investment policy that has been called ‘dark green’ by some – effectively ruling out investing in anything with a weapons, gambling, booze or tobacco slant, which covers a fair slug of the FTSE 100 – the fund expands its investment universe into the mid cap and smaller companies space where it regularly grills company bosses on their environmental and social strategies and how they might impact long-run returns.

This policy means the fund pitches itself as a medium risk ESG-style fund option. About 30% of the portfolio can be aimed at bonds for safety, while cash and hedging levers can be pulled when equity markets are under pressure. 

 

GOVERNANCE

First State Asia Focus (BWNGXJ8)

We’ve selected this fund for the way First State Stewart Asia – an autonomous investment management team within First State Investments – pays particular attention to governance issues. It only invests in companies where it perceives the management operates the business effectively and in the interest of all stakeholders.

It says: ‘Companies that do not look after their customers, employees, suppliers and the larger community are unlikely, in our view, to be rewarding long-term investment.’

This approach is embedded into the fund’s broader focus on ESG. The team seek out quality companies defined by the strength of their management, financials and franchise.

‘The pursuit of immediate gains through short-sighted strategy, reckless conduct, or the exploitation of labour, tax loopholes, legislative arbitrage or the environment runs contrary to this definition of “quality”,’ it adds.

The funds invests at least 80% of its money in shares which are based in, or do business in, the Asia Pacific region including Australia and New Zealand but excluding Japan. It is allowed to invest up to 20% of its money in companies around the world.

You’re getting exposure to mid and large-sized companies – at least $1bn in size. The portfolio includes Indian financial group HDFC Bank and Australian biotechnology group CSL.

 

ETHICAL

Rathbone Ethical Bond (B77DQT1)

Income investors skittish about toppy equity markets and seeking shelter in the form of investments with an ethical bent might look to this socially responsible investment (SRI) fund, which has handsomely outperformed the IA Sterling Corporate Bond sector over the past 10 years.

The quarterly dividend-paying fund provides a regular, above-average income by putting money to work with a range of bonds and bond market instruments meeting strict ethical and financial criteria.

Steered by Rathbones’ head of fixed income Bryn Jones and deputy manager Noelle Cazalis, the fund focuses on high quality, investment grade bonds and aims to deliver a high 5% to 7% yield.

The ethical overlay, provided by a dedicated research team, provides an extra level of investment diligence and helps the managers to spot problems that might affect bond performance at the earliest stage.

 

SUSTAINABLE DEVELOPMENT

Stewart Investors Worldwide Sustainability (B7W3061)

Not a pure ESG fund in the strictest sense, Stewart Investors Worldwide Sustainability is known for putting socially important and sustainable business models front and centre of its stock selection process.

Typically holding 40 to 60 stocks drawn from all over the world, it seeks proven management, strong balance sheets and long-run earnings potential from medium-sized companies.

Headed by manager Nick Edgerton, the fund puts great stock in the strength and talent of its team with individuals bringing particular expertise in niche areas thanks to original and independent research.

Absolute returns remains the goal rather than beating a particular benchmark. ‘It’s not likely to outperform in frothy bull markets, but it should hold up well when markets falter, a feature we saw in 2018 pleasingly,’ says Morningstar analyst Ronald van Genderen. ‘It’s admirable that Stewart Investors encourages alignment with shareholders by paying good parts of the team’s bonus into the funds.’


PASSIVE FUNDS

SOCIAL

iShares MSCI USA SRI UCITS ETF (SUAS)

This exchange-traded fund (ETF) is a cheap way to get exposure to the big US companies, but without the possibility of inadvertently putting money into firms raking in shedloads from dodgy activities.

The fund negatively screens companies, so it excludes them if they are involved in any of the following activities: biological and chemical weapons, nuclear weapons, uranium weapons, landmines, civilian firearms, tobacco, cluster bombs, and violation of the UN Global Compact.

The likes of Boeing, Lockheed Martin and General Dynamics are out; and in are names such as Microsoft, Proctor & Gamble and Walt Disney.

It’s important with this ETF to think what socially responsible means to you, as the likes of McDonald’s and Pepsi are in the fund’s top 10 holdings and some people may think fast food and fizzy drinks are no  good for society.

 

ALL-ROUNDER

iShares MSCI World ESG Enhanced UCITS ETF (EEWD)

One of six ETFs BlackRock launched earlier this year to give investors exposure to the ESG space at a low cost, this ETF invests in a wide range of large and mid-cap companies across 23 developed markets.

It provides diversified exposure to more than 1,300 companies, skewed heavily towards the US which makes up 61.5% of the fund’s geographic exposure.

The ETF reweights stocks to maximise ESG scores while remaining close to benchmarks, but aims to hold companies that will produce 30% less carbon emissions than the benchmark.

It also screens out companies with exposure to controversial and nuclear weapons, tobacco, civilian firearms, coal and oil sands, and those mired in big controversies.

But it’s important to note the fund does still hold oil companies such as ExxonMobil, Chevron and BP as these businesses are active in renewable energy and electric vehicle infrastructure developments which means they can can score positively from an ESG perspective.

 

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