If you’re buying shares in a company, you’d probably rather it wasn’t doling out cigarettes to children, or belching carbon emissions into the Brazilian rain forest. You’re not the only one. Increasingly there is an awareness that companies are more than the sum of their profits - they also have responsibilities to society, to the environment and to their staff and customers.
Ethical investors will argue that looking at how companies are run and weeding out the baddies can protect you against some of the biggest risks out there. They have a point. Governments and regulators are getting tougher and tougher. Companies who are reckless with the environment or with their workers’ health face tougher fines, and greater scrutiny. In a world of Twitter and Facebook, information is more easily disseminated. That can mean bigger share price sell-offs when they get things wrong.
The performance problem?
However, while investing ethically makes plenty of sense from a risk point of view, there has also been a perception that investors will be giving something up returns-wise by going green. But that’s not really supported by the evidence, which actually suggests you don’t have to take any hit at all over the long-term.
Research from Hermes, which has an ethical screen across all its funds, says companies with strong ‘corporate oversight’ – i.e. that are run ethically - have tended to outperform their poorly governed competitors by an average of over 0.3% per month since the beginning of 2009 – that’s 3.6% a year, or 32.4% over the full nine years. The group has also found that this ‘ethical’ premium holds true across different geographies and sectors. (https://www.hermes-investment.com/ukw/wp-content/uploads/sites/80/2017/07/Hermes-ESG-Investing.pdf)
Here are 10 top-performing funds with high sustainability ratings on Morningstar, compared to a popular index tracker fund (Vanguard FT) and a top-performing managed fund with a lower sustainability rating (Fundsmith Equity).
Source: Morningstar, 2018
Although Fundsmith Equity has had greater gains over three years (some of the highest in its class), the sustainable funds come in about even over the shorter term. They're also well ahead of the index fund. Ethical companies perform better as environmental and social regulations tighten, so that long term gap may well close. If you'd like to invest in something with a bit more punch than an index fund, ethical funds are a viable alternative.