Investing: ethical funds delivering better returns

New data suggests ethical funds are outperforming rivals that invest in oil, gambling and tobacco.

If you want to make money from your investing, then there may be times when you have to hold your nose over the activities of those firms you have backed with your cash.

Or at least that was the conventional wisdom. 

The idea was that to really get the most bang for your buck, you would inevitably have to put some money into businesses involved in oil, arms, gambling, tobacco and the like.

By contrast, if you wanted to follow the ethical route and stick to firms who weren’t involved in those areas, then there would be an unavoidable knock-on effect on your overall returns.

However, is this really true? New data suggests not.

Impossible to ignore

A study from financial information site Moneyfacts looked at the returns on offer from ethical funds and their non-ethical equivalents, over the 12 months to the start of July.

And the 140 ethical unit trusts saw an average growth of a little over 4% over that period, compared to a 1.5% fall for non-ethical funds.

Over a longer period the contrast is clear too ‒ over five years, ethical investments grew 41% ahead of the 32% achieved by non-ethical rivals, while over 15 years ethical funds have delivered returns of above 200% ahead of the 156% returned by non-ethical funds.

Richard Eagling, head of pensions and investments at Moneyfacts, suggested that the returns were so strong that ethical funds were now “impossible to ignore” for any investor, whether they are sustainably minded or not.

Increase in interest

It’s notable that the performance of ethical funds is catching the eye of investing platforms too. Indeed, AJ Bell has this week added four new environmental, social and governance (ESG) focused funds to its favourite funds list.

What’s more, the firm said it had acted to increase the number of these sorts of funds on its list as a result of the “clear increase” in interest towards responsible and sustainable investing.

Ryan Hughes, head of active portfolios at AJ Bell, noted that as there is no clear definition of what constitutes ESG investing, it had focused on those with a “significant heritage of investing this way and have ESG in their DNA, rather than those who have only just seen the virtues of ESG investing”.

What difference will Covid make?

It’s one thing to invest ethically when everything seems to be rosy of course, but what about when things are less comfortable? Will Covid-19 have any impact on the value people put on ethics when it comes to their investing?

The answer varies, depending on who you speak to.

A survey by the FT and Savanta of wealth managers found that a whopping nine out of ten believed that the crisis would lead to an increase in interest in responsible investing, with advocates arguing that the pandemic has reinforced the fact that we are part of something much bigger and need to consider the impact our decisions have on other people, and the planet as a whole, beyond our own interests.

But then research from Deutsche Bank suggests that investors had significantly curtailed their investment in ESG funds in the last three months, begging the question of whether the interest in sustainable investing is really built on solid foundations.

In all honesty, it’s probably too soon to tell. Just because investors may have paused their activity during the Covid crisis, that doesn’t mean they’ve abandoned their ethical intentions ‒ it may be that they are simply shoring up their finances due to the uncertainty, with the aim of ramping up their investing again when things start to improve.

Ultimately only time will tell. But it seems pretty clear to me that investors are far more engaged now with where their money is being invested, and whether it’s going into businesses that are engaged in responsible, sustainable activity.

And so long as there is a drive from at least some investors to focus their activity on ethical areas, then investment firms will have to continue to deliver funds that match their requirements and provide a competitive return.

What’s more, for as long as ethical funds deliver superior results to non-ethical rivals, I don’t see much reason why you wouldn’t invest in them, no matter how important sustainability is to you.