How to boost your portfolio’s ethical credentials

I have previously written about ethical funds and how they deserve a place in your portfolio. In fact, the research concluded that ethical funds have generally been stronger performers than their non-ethical peers over the short term and long term. It means that investing ethically does not have to negatively impact your investment returns.

However, while the demand for ethical investment solutions is increasing, the level of information available to investors is not keeping pace. One of the first challenges for investors wanting to invest ethically is determining which companies and funds are actually run in an ethical and sustainable way.

Of course, there's the additional problem of the lack of a standardised definition of what constitutes "good ethics". There's also a range of acronyms, including ESG (Environmental, Social and Governance) or SRI (Socially Responsible Investing) that you need to navigate and understand.

In short, SRI was really the precursor to ESG. ESG investing is a strategy where you consider what impact a company is having on the environment, its staff or the community, as well as whether it is run to impart positive change. This can take in a large number of factors including the company's carbon footprint, contribution to pollution, record on equal rights, or even levels of executive pay. However, it is not easy for individuals to determine the ESG credentials of a company whose shares they invest in or to judge the ESG credentials of a fund.

So, due to demand from 80-20 Investor members, I've set out four steps to help you identify funds that are being run in an ethical and sustainable way, and which are not just labelled as such. I also tell you how to dig deeper on a fund, even if it's not defined as ethical (perhaps it is a non-ethical fund you already hold in your portfolio), to judge for yourself its ESG credentials. I then reveal an ethical fund shortlist that can be a good starting point for your ethical research if you are feeling overwhelmed by the minefield that is ethical investing. Finally, I provide a shortlist of ethical funds that are showing signs of momentum, as judged by 80-20 Investor, at this current moment in time vs their peers.

If you want to understand more about ethical and green investing and what your options are, then make sure you also watch the recording of our live ethical investing event -  Ethical & Sustainable Investing - Can it improve the world AND your wealth?

How to make your portfolio more ethical

1. Choose from a list of ethical investment fund options

Below I provide links to three PDFs that I have created that show the funds designated as having sustainable or ethical credentials in the way that they are managed, regardless of the labels or sectors they reside in. You may notice that there may be funds within supposedly ethical or sustainable sectors, most notably in the ETF universe, that don't make the lists. The criteria for inclusion also takes into account fund availability on major investment platforms.

• Ethical unit trusts
• Ethical investment trusts
• Ethical ETFs

2 Analyse the ESG rating of a fund or company you invest in

If you invest in a fund or the shares of a major company, it is possible to determine an ESG rating for them. MSCI has produced a tool that summarises its research on 2,800 companies' ESG credentials and provides a rating for them.

The MSCI explain its rating system as follows... "MSCI ESG Rating is designed to measure a company’s resilience to long-term, industry material environmental, social and governance (ESG) risks. We use a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers. Our ESG Ratings range from leader (AAA, AA), average (A, BBB, BB) to laggard (B, CCC). We also rate equity and fixed income securities, loans, mutual funds, ETFs and countries".

To use the MSCI ESG rating tool, simply click on the name of a company you are interested in. It will then give you an overall ESG rating, as well as break it down into which areas the company is a leader or a laggard amongst its peers.

If you want to apply the tool to a fund that you hold, or are interested in, then I suggest you download the fund's factsheet and look at the funds top 10 listed holdings. Then simply go through each company in turn and use the tool to get a steer of each company's ESG credentials - assuming they are contained within the tool. It means that you can then make a judgement on a fund's overall ESG position. Rather than download the fund factsheet to find a fund's top 10 holdings, most investment platforms will often provide this information when you research a fund.

3 Use a third party curated best buy list

Interactive Investor has created a rated shortlist of ethical funds. The shortlist of 40 funds is broken by investment sector, but also by three ethical investment styles which show how proactively a fund is managed in terms of ethics.

• Avoids - Funds that focus on excluding companies, sectors or specific business practices, in line with the published fund criteria that may focus on ethical, social and/or environmental issues.
• Considers - Funds that actively consider ethical and/or environmental, social and governance (ESG) issues as part of their investment strategies.
• Embraces - Funds that focus on companies delivering positive social and/or environmental outcomes.

I am not suggesting that you necessarily buy from the published list, but it can be a great source of information and a starting point for your own research. In addition, you can see if any funds which you currently invest in are included on the shortlist.

4 Ethical funds showing signs of momentum

Finally, below I've provided 2 tables that give a shortlist of those funds which are showing signs of momentum vs their peer group at the current moment in time. Obviously, there is no guarantee that the signs of momentum will continue. You will notice that I have only provided tables for the unit trust and ETF universes. That is because there is a very limited number of ethically managed investment trusts so as to make comparisons somewhat meaningless.

Unit Trusts

Name	Sector	ISIN Code	1 month return	3 month return	6 month return	Max weekly fall in 6 months	Ongoing charge
CFP Castlefield B.E.S.T Sustainable European General	Europe Excluding UK	GB00BF4VR355	3.58	8.84	15.02	-7.13	1.12
TM Rectory Sustainability	Flexible Investment	GB00BYXBJZ51	2.42	8.67	15.15	-6.87	1.06
LF Montanaro Global Select	Global	GB00BJRCFN97	7.32	11.09	17.22	-12.27	0.9
M&G Global Select	Global	GB00B7D8K769	1.02	4.61	14.46	-2.92	1.15
Quilter Investors Ethical Equity	Global	GB00B0JZPC21	2.2	7.64	15.22	-5.4	1.65
Morgan Stanley Sustainable Fixed Income Opportunities Fund	Global Bonds	GB00BNKVP424	0.4	0.99	0.34	-1.4	0.6
Baillie Gifford Responsible Global Equity Income	Global Equity Income	GB00BFM4N494	1.78	5.78	11.53	-6.38	0.54
Royal London Sustainable Managed Growth Trust	Mixed Investment 0-35% Shares	GB00B8H7XS88	1.78	4.33	4.15	-2.9	0.67
AXA Ethical Distribution	Mixed Investment 20-60% Shares	GB0005409262	2.68	4.98	11.06	-1.53	0.78
Rathbone Active Income and Growth Fund	Mixed Investment 20-60% Shares	GB00B844SW18	0.79	2.87	7.31	-2.29	0.53
Rathbone Core Investment Fund for Charities Fund	Mixed Investment 40-85% Shares	GB00BZ02MC60	0.83	3.8	11.11	-2.3	0.52
Royal London Sustainable World Trust	Mixed Investment 40-85% Shares	GB00B882H241	2.66	7.43	10.51	-6.82	0.77
ES AllianceBernstein Concentrated US Equity	North America	GB00BL4SF671	2.52	7.51	18.32	-4.68	0.85
FP Foresight Sustainable Real Estate Securities	Property Other	GB00BMFYBB80	4.01	7.72	13.35	-3.42	0.85
COIF Charities Ethical Investment	Specialist	GB00B57RJ342	2.04	5.39	12.24	-4.07
ASI Ethical Corporate Bond	Sterling Corporate Bond	GB00B708KW45	1.33	2.78	0.8	-2.8	0.66
BNY Mellon Responsible Horizons UK Corporate Bond	Sterling Corporate Bond	GB00B8KK2216	1.46	2.87	0.9	-2.87	0.55
Close Sustainable Bond Portfolio	Sterling Corporate Bond	GB00B7V89J33	0.94	2.25	1.11	-2.22	0.48
Rathbone Ethical Bond Fund	Sterling Corporate Bond	GB0030957137	0.83	2.17	1.03	-2.64	1.28
Royal London Sustainable Managed Income Trust	Sterling Corporate Bond	GB00B8HNKY10	1.33	2.91	1	-2.54	0.59
Sarasin Responsible Corporate Bond	Sterling Corporate Bond	GB00BYMB5T28	1.29	3.12	1.29	-2.99	0.61
M&G Global High Yield ESG Bond	Sterling High Yield	GB00BJRCB864	-0.01	0.82	1.17	-0.88	1.03
LF Montanaro UK Income	UK Equity Income	GB00BJRCFW88	4.94	11.33	21	-1.11	0.8
CFP Castlefield B.E.S.T Sustainable UK Smaller Companies General	UK Smaller Companies	GB00B1XQNH95	-0.59	7.26	24.73	-1.63	1.14

 

ETFs

Name	Sector	ISIN Code	1 month return	3 month return	6 month return	Max weekly fall in last 6 months	Ongoing charge
Fidelity Sustainable Research Enhanced Pacific ex-Japan Equity	Equity - Asia Pacific ex Japan	IE00BNGFMY78	-0.73	-0.35	5.33	-2.61	0.3
Invesco MSCI Pacific Ex Japan ESG Universal Screened	Equity - Asia Pacific ex Japan	IE00BMDBMT65	-0.68	-0.45	4.74	-2.89	0.19
Invesco Quantitative Strategies ESG Global Equity Multi-Factor	Equity - Ethical	IE00BJQRDN15	0.69	6.15	12.99	-4.09	0.6
JPM CarbonTransition Global Equity	Equity - Ethical	IE00BMDWYZ92	0.9	6.33	12.2	-3.81	0.19
JPM Global Research Enhanced Index Equity (ESG)	Equity - Ethical	IE00BF4G6Y48	1.01	6.35	12.15	-3.74	0.25
L&G Clean Water	Equity - Ethical	IE00BK5BC891	3.33	7.59	17	-3.16	0.49
Lyxor Net Zero 2050 S&P World Climate	Equity - Ethical	LU2198882362	1.47	7.75	12.32	-4.64	0.2
Lyxor Net Zero 2050 S&P Eurozone Climate	Equity - Europe ex UK	LU2195226068	1.78	7.16	14.91	-3.09	0.2
UBS (L) Fd Sl Bloomberg Barclays MSCI Euro Area Liquid Corp Sustainable	Fixed Int - EUR Corporate Bond	LU1484799769	0.67	0.05	-1.67	-3.36	0.2
L&G ESG EM Gov Bond Usd 0-5 Years Inc	Fixed Int - Emerging Markets	IE00BLRPQP15	-0.54	0.67	-0.78	-2.56	0.25
L&G ESG China Cny Bond	Fixed Int - Other Single Currency	IE00BLRPQL76	0.73	1.96	1.32	-1.73	0.3
Lyxor Global High Yield Sustainable Exposure	Fixed Int - USD High Yield	LU2099295466	-0.4	1.84	1.28	-2.78	0.25
Xtrackers ESG Corporate Bond	Fixed Int - USD Corporate Bond	IE00BL58LJ19	0.89	4.45	0.34	-5.47	0.16