Risk becomes reality for ESG based funds

The last three months have been difficult for investors generally, with share prices falling, particularly outside of the UK.

But, for investors who prefer to have their investments screened for environmental, social and governance factors, the last quarter has been particularly difficult.

The UK stockmarket has held up pretty well. The Vanguard FTSE All Share Index unit trust (a fund, which we regularly recommend) simply tracks the performance of the FTSE All Share Index of quoted companies. The fund was up by 0.97% over the three months to 25th March.

Compare this to the L&G Future World ESG UK Index fund. This fund starts with the FTSE All Share Index, but screens out coal miners, manufacturers of controversial weapons, perennial offenders of the UN Global Compact and tobacco companies. This fund lost 18.47% of its value over the same period.

The difference is evident from the top 10 holdings of both funds – Vanguard holds Shell, BP, British American Tobacco, whilst L&G doesn’t. Companies that don’t stack up well from an ethical perspective have produced better returns in the last three months.

The same is true for global stockmarkets too, although the world’s largest companies – Apple, Microsoft, Amazon, Alphabet and Tesla – are perceived as being less controversial. These companies appear in the top 10 holdings of many ethically screened funds too, so the difference between traditional and ethically screened tracker funds of global shares is less marked.

Ethically screened funds give you two types of return – the usual, measurable investment returns, and a non-monetary return (from the knowledge that you aren’t investing in tobacco, weapons, gambling or coal mining etc.). This latter return can’t really be measured and its value will be different for every investor.

However, the non-monetary starts to become quantifiable in extreme times like this. You can ask yourself whether you would have been happier with a higher return, whilst having the knowledge that you had been investing in cigarettes, weapons, gambling and fossil fuels. Our expectation is that most ethical investors would prefer to accept the additional risk. However, if you would like to revisit your position, please let us know. Our job is to give you impartial advice and to help you with decisions like this.

In the long-run, the rationale for an ESG-based investment approach is strong, even for those who are simply searching for the highest return. However, ESG screened funds have a smaller choice of allowable investments and this increases the risks they face.

Oliver Wise

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. 
Past performance is not a reliable indicator of future performance. 

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