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Green finance: The most sustainable funds revealed

by LLB Reporter
18th Feb 22 12:50 pm

Ethical’ or ‘responsible’ investment is a continuingly evolving marketplace, encompassing a variety of approaches and products designed to help investors ‘do good’ with their money.

This is particularly apparent looking at the depth and breadth of best buys on interactive investor, the UK’s second largest DIY investment platform.

The urgency of the climate agenda, as well as changing attitudes towards (and more awareness of) companies’ social practices, has sparked an increased amount of retail investor awareness for sustainable investment products.

This has been reflected by UK policymakers, as well – we’ve seen increasing initiatives from the Treasury and the FCA, to meet, and encourage, this demand, and to help retail investors find the products that truly meet their ‘green’ expectations.

Today, interactive investor, the UK’s second-largest DIY investment platform, highlights the most bought funds, investment trusts, and ETFs, in ISAs from its ethical long list from the 6th April 2021-16th February 2022.

While there’s plenty of generalist ‘sustainable’ funds on the list, headed up by Baillie Gifford Positive Change, impact funds are featuring strongly. iShares Global Clean Energy UCITS ETF is in second place, while six of the top ten are investment trusts, many with a focus on renewable energy infrastructure. While ‘real assets’ such as infrastructure are often seen as a way of protecting against rising prices, the popularity of these trusts pre-dates the current ‘red hot’ inflationary environment, and yield could well be a key driver.

Half of the top twenty are ‘impact’ type investments, focussing on issues-based investments such as renewable energy, social housing, waste management and founding, building and funding transformational healthcare companies.

What does the current rotation into value stocks mean for ethical funds?

Kyle Caldwell, collectives specialist at interactive investor, says: “In 2021, there was plenty of investor appetite for funds that invest in a socially responsible fashion. Figures from the Investment Association* showed that over the year, £16 billion was invested in responsible investment funds. This was £4.3 billion higher than in 2020 – a significant amount of growth.

“While there have been various drivers behind the increased levels of popularity, the strong performance of many ethical funds in recent years has surely helped. A tailwind that has provided a boost to performance for ethical funds has been the growth style of investing being in favour. But in recent weeks, this tailwind has turned into a headwind amidst a market rotation away from growth and into value, with some investors suggesting a potential end to the decade-long run for growth shares as interest rates rise in an attempt to combat high inflation.

“Value shares, which are often more economically sensitive and benefit from higher interest rates, often fail to meet the requirements of funds that focus on environmental, social, and governance (ESG) criteria. If this market rotation is sustained, it will be interesting to see whether this dents the popularity of ethical funds in the months and years to come.

“In reality though, any potential ‘great rotation’ towards value is unlikely to go in a straight line, and as always balance is key. Investing ethically is all about doing well by doing good, and those who genuinely want to invest within an ethical framework have plenty of choice in a sector that has grown in depth and breadth. Looking at the best buys over the current tax year showcases the variety of offerings with some tangible social benefits.”

Rebecca O’Connor, Head of Pensions and Savings, interactive investor, adds: “Some ESG-focused investments took a hit early in the year as macro-economic factors, such as a rise in interest rates, became unfavourable and certain sectors that feature heavily in ESG funds including technology, suffered declines as a result. However, some investors may feel that the values among funds in this area, having fallen, now look attractive again.”

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