Investment | Ethical Investment | UK Investors | Sustainability Funds (2024)

Evidence that investment with an emphasis on the environment is going mainstream

Environmentalists cheered by the huge improvements in air quality during the shutdown – and the collapse of coal-fired power generation – have another reason to cheer. Even the stock market works in their favor.

Detailed analysis of environmentally sustainable funds shows that they outperform traditional funds – beating them throughout the pandemic as well as the next 10 years and including the coronavirus sell-off.

The data, from global research agency Morningstar, comes amid growing evidence that investing in the environment – once branded by city traditionalists for the vegetarian / hippie minority – is becoming mainstream. This week, Vanguard, one of the world’s largest fund managers, launched two ethical index funds aimed at British investors, while Aviva, Britain’s largest insurer, announced the fund. “climate transition”.

Morningstar looked at 745 sustainability funds and compared them to 4,150 traditional funds and found that they matched or exceeded returns across all categories – whether bonds or stocks, UK or overseas .

“The average returns and success rates of sustainability funds suggest that there are no performance tradeoffs associated with sustainability funds. In fact, the vast majority of sustainability funds have outperformed their traditional peers over a range of time periods,” said Over 10 years, the average annual return of an investment sustainability fund into major global companies is 6.9% per year, while traditional hedge funds earn 6.3% per year.

Outperform activity continues during the coronavirus crisis. Morningstar said: “In all but one of the categories considered in the study, sustainability funds outperformed, with Q1 2020 average excess returns ranging from 0.09% to 1.83 % for all types of funds”.

One reason could be that many U.S. technology stocks, popular among environmental investors, have skyrocketed in times of crisis, while shares of oil, gas and coal companies have fallen. The Nasdaq index of US tech stocks has fully recovered from the coronavirus crisis, hitting new highs this week, while oil giant ExxonMobil is trading at $53 from $70 before the close. door.

Morningstar researchers note that sustainability funds outlast their peers. One of the tricks of the wealth management industry is that underperforming funds are quietly eliminated – often by consolidating them with another better performing fund. This has the effect of improving overall performance, showing that investors are doing better in the long run than they actually are. Morningstar found that three-quarters of sustainable funds have a lifespan of 10 years or more, compared with less than half of traditional funds.

Campaigners hail confirmation that sustainable funds are better. Michael Kind of ShareAction – a charity and company promoting responsible investing – said: “It’s very positive, but it’s also not surprising to see that funds with strong environmental strategies, Social and governance (ESG) are generally more financially efficient. Investors often tell us that one of the biggest barriers to action is that they feel you will lose financially if you switch to responsible investing.

“But is that enough?” No… we expect authentic and more ambitious ESG funds to deliver better results for stakeholders and the environment, but inevitably give investors more money every time.

Share Action Checklist to make your money more socially responsible

• Research the funds offered by your retirement/ISA/investment provider.
• Review the holdings and management/investment policies of your funds or those in which you intend to invest. These policies outline how your wealth manager will invest your money and attempt to influence companies on your behalf. You can do this yourself or request this information from your investment (or pension) provider/employer/financial advisor.
• It is important to see how your investment provider votes at the general meetings of the world’s largest companies. Do they vote for climate action and support human rights?
• Share Action recently released an independent global ranking of the most responsible asset managers on a variety of topics. Use it to make informed decisions when choosing a manager.
• Use resources from organisations like Climetrics, Boring Money, and Good With Money.

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What are the key risks?

1. You could lose all the money you invest

• If the business offering this investment fails, there is a high risk that you will lose all your money. Businesses like this often fail as they usually use risky investment strategies.

• Advertised rates of return aren’t guaranteed. This is not a savings account. If the issuer doesn’t pay you back as agreed, you could earn less money than expected or nothing at all. A higher advertised rate of return means a higher risk of losing your money. If it looks too good to be true, it probably is.

• These investments are sometimes held in an Innovative Finance ISA (IFISA). While any potential gains from your investment will be tax free, you can still lose all your money. An IFISA does not reduce the risk of the investment or protect you from losses.

2. You are unlikely to be protected if something goes wrong

• The business offering this investment is not regulated by the FCA. Protection from the Financial Services Compensation Scheme (FSCS) only considers claims against failed regulated firms. Learn more about FSCS protection here.https://www.fscs.org.uk/what-we-cover/investments/or

Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.https://www.fscs.org.uk/check/investment-protection-checker/

• The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.https://www.financial-ombudsman.org.uk/consumers

3. You are unlikely to get your money back quickly

• This type of business could face cash-flow problems that delay interest payments. It could also fail altogether and be unable to repay investors their money.

• You are unlikely to be able to cash in your investment early by selling it. You are usually locked in until the business has paid you back over the period agreed. In the rare circ*mstances where it is possible to sell your investment in a ‘secondary market’, you may not find a buyer at the price you are willing to sell.

4. This is a complex investment

• This investment has a complex structure based on other risky investments. A business that raises money like this lends it to, or invests it in, other businesses or property. This makes it difficult for the investor to know where their money is going.

• This makes it difficult to predict how risky the investment is, but it will most likely be high.

• You may wish to get financial advice before deciding to invest.

5. Don’t put all your eggs in one basket

• Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.

• A good rule of thumb is not to invest more than 10% of your money in high-risk investments.https://www.fca.org.uk/investsmart/5-questions-ask-you-invest

If you are interested in learning more about how to protect yourself, visit the FCA’s website here:https://www.fca.org.uk/investsmart

For further information about minibonds, visit the FCA’s website here.https://www.fca.org.uk/consumers/mini-bonds