Fixed income funds can also offer plenty of opportunities for those looking to invest in a sustainable way. Ethical, impact and sustainable bond funds look to invest in the debt of companies which meet their criteria while also delivering a ripe yield.
The Kames Ethical Corporate Bond fund takes a “dark green” approach to investing, screening out around 50% of the potential investment universe. The fund won’t hold bonds issued by companies that derive revenues from any unethical activities including tobacco, arms, gambling and animal testing. It even rules out UK Government gilts because money loaned to the government is not ring-fenced.
Manager of the fund Euan McNeil says: “With a Gilt, you have no idea where proceeds of your loan are going – it could be on defence.” While other governments, such as those in Scandanavia, have issued green bonds where money is ring-fenced for renewable projects, the UK is yet to do so. “We would definitely consider investing if the UK government issued green debt. But I can’t understand why it hasn’t done so yet; people are often cynical about the motivations of governments doing it,” adds McNeil.
Renewable energy is a big theme in the portfolio, and among its holdings are Danish wind farm developer Orsted (ORSTED), as well as TC Dudgeon and Greater Gabbard, companies involved in supplying the infrastructure that bring the electricity from offshore wind farms on to the grid.
Elsewhere, he likes the financial services sector but only those institutions focused on retail customers, such as insurance firm Aviva (AV.) and high street bank RBS (RBS); investment focused banks such as Barclays (BARC) are screened out because it’s not clear where the money loaned through the bond is going.
And while it might not seem an obvious choice for an ethical portfolio, Transport for London accounts for about 3% of the portfolio. “The efforts TFL has made in restricting emissions in London and encouraging alternative methods of travel is something we’re very happy to support,” says McNeil. The Neutral-rated fund yields 2.7% and has delivered annualised returns of 4.6% over five years.
Global Themes
Bryn Jones, manager of the Rathbones Ethical Bond fund, looks at big global themes such as ageing populations and increasing regulation in the financial sector. He then identifies good companies trading at reasonable valuations, which also meet the fund’s ethical criteria. If a business has just one negative factor – a high carbon impact, for example – it can’t go in the portfolio. A company must also have at least one positive attribute such as good diversity or a positive impact on the environment.
Social housing is a key theme in the fund currently and Jones also likes French insurance groups and banks. “Insurance might not sound like an obvious ethical investment, but if your house burns down and you haven’t got insurance then you have nowhere to live,” he explains.
The three-star rated fund has delivered annualised returns of 5.2% over five years and currently yields around 3.9%, although Jones admits that currently delivering this level of income means eating into some of the capital growth.
Jones says: “Younger people are increasingly involved in investment decisions, there’s greater diversity among investors and the perception that investing ethically means compromising returns has really shifted. The last few years have been incredible – demand for ESG has gone through the roof.”
Investors may be concerned that the additional screening that ethical bond funds employ limits their investment options. But Simon Bond, manager of the Threadneedle UK Social Bond fund, says investing through bonds rather than company stocks means he has a much wider pool of investments to choose from, including local authorities, charities and not-for-profit organisations. He adds: “Bonds are a much more targeted way of following money being spent in society to analyse the good that it’s doing for local communities and local economies too.”
Bonds in his portfolio include one issued by Manchester University, used to build student accommodation and additional lecture facilities, one issued by the Peabody Trust, used to build social housing, and another issued by HSBC used for environmental and social projects. He also holds a green bond issued by the Irish government, used in its efforts to reduce greenhouse gas emissions, to plant forests and build flood defences. The three-star rated fund yields 2.3% and has delivered annualised returns of 4.2% over five years.
