Three ESG fund winners and three spinners

Ethical financial adviser Castlefield names three best-in-class sustainable funds and three that are arguably not practising what they preach.

The sustainable investment arena is a minefield for the rapidly growing ranks of private investors keen to know their money is invested for the good of the environment and society.

If anything, it is becoming even more difficult as an increasing number of asset managers turn their attention to securing a piece of the green action.

That’s great news on one level, but the challenge for investors is not simply to work out which funds offer the kind of ‘green’ or sustainable strategy they want to back, but also to be sure that managers are actually practising what their marketing patter preaches.

This is where our latest Winners & Spinners report can offer some pointers for investors. It highlights three sustainably focused funds that we believe are genuinely committed to their purpose and transparent to investors, while also naming three funds where the sustainable investment moniker sits awkwardly, and challenges the managers concerned.

• Ethical investing jargon buster
• Want to invest ethically? ii’s ACE 40 list of ethical investments can help
• ESG fund speed dating: the key questions to ask to find your match​​​​​​​

Three ethical winners

The three winners selected reflect the diversity of legitimate sustainable fund focuses and strategies available, but they each demonstrate that fund managers have gone the extra mile to embed their sustainable principles and communicate them clearly to investors.

It is hard to imagine a clearer example of full-blown positive investing – which aims to produce measurable real benefits for the planet – than FP WHEB Sustainability. This is the only fund in the WHEB stable and its focus is exclusively on finding companies with solutions to the sustainability challenge of moving to a zero-carbon economy and supporting a healthier planet and society.

We have been particularly impressed by the firm’s drive for true transparency, publishing the minutes from the meetings where the team’s investment proposals are challenged by its independent advisory panel. We are also big fans of WHEB’s online ‘impact calculator’, whereby investors can see exactly how much positive difference their money has made over a specified timescale. It is a great way to encourage people to think about their investments in terms of outcomes for good rather than just financial returns.

Royal London Ethical Bond fund, the second winner, is a very different proposition, in several respects. Its fixed-interest portfolio is primarily the product of a negative screening approach, whereby bonds issued by businesses with significant interests in eight key areas are excluded from consideration as potential investments.

It has been selected for its consistent long-term outperformance, coupled with a set of ethical criteria that seem to us to be very much in tune with investor concerns, and a rigorous bottom-up investment process whereby each company’s environmental, social and governance (ESG) credentials or ‘positive net benefit’ case is given the same weighting as its financial analysis.

• Rathbone Ethical Bond Fund: finding the best bonds
• How a star small-cap manager uses ESG to find tomorrow’s winners
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

Stewart Investors has a well-established reputation for the quality of its sustainability funds, and Stewart Investors Worldwide Sustainability is our third winner. The aim is to identify those businesses – in emerging markets as well as mature economies – that make a net positive impact on the world. Positive engagement with companies to get them to improve their practices is another cornerstone of the process.

Three ethical spinners

We’re looking here for ‘greenwashing’ – ESG marketing hype that is not reflected in the running of the fund or make-up of the portfolio. Notably, two of our spinners are index trackers, although they are included for different reasons.

The L&G Future World Girl fund was launched in September 2018 and is a passive UK fund with a gender equality focus. It tracks the Solactive L&G Gender in Leadership UK index, which ranks companies on the basis of four measures of gender diversity.

The marketing material talks much about the business benefits of gender-diverse teams - a proposition that has been backed up by academic evidence. Unfortunately, though, L&G fails to walk its own walk: closer examination of Solactive, the German company selected by L&G to operate the index, reveals that it is run by an all-male management team.

When we put the criticism to L&G, it replied: “We take the issue of gender equality and the importance of diversity very seriously in our own organisation and in those we engage with, as well as in those we invest in.” But it recognises that work needs to be done. The fund is currently being reviewed; feedback from that exercise will be addressed and incorporated, and steps taken to ensure that “marketing material aligns with the fund’s objectives”.

The second spinner, Schroder Responsible Value UK Equity, focuses on undervalued stocks but uses negative screening to exclude a range of companies involved in questionable industries.

The difficulty is that although the team follows a rigorous, rules-based selection process, there is almost no environmental or climate change screening. As a consequence, manager Nick Kirrage holds substantial positions in companies including BP (LSE:BP.),  BHP (LSE:BHP) and Barclays (LSE:BARC), which seems in keeping with a ‘value’ mandate but unlikely choices for any ‘responsible’ fund.

Schroder argues that the managers “actively engage with businesses on corporate government, appropriate environmental and employment practices, fair treatment of customers and suppliers… If they believe a company is not acting in the best interests of long-term shareholders, they do all they can to drive positive change.”

Unexpected constituents also account for the presence of the Invesco S&P500 ESG Ucits ETF (LSE:SPXE) in the Spinners list. This is a new fund launched in March 2020, promising a risk/return profile similar to that of the S&P 500 index but with a greater focus on ESG.

So, tobacco, coal and controversial weapons companies are screened out – but the screen allows some surprising constituents, particularly on the environmental side. For example, US oil giant Exxon Mobil (NYSE:XOM) is the third-largest holding, accounting for 5% of the fund. Other controversial inclusions focus on mining, shale oil, oil sands drilling and gambling.

Invesco claims only that the ETF will provide superior ESG characteristics to the S&P 500, so greenwashing is less of an issue here. However, it is a good example of the importance of checking ‘under the bonnet’ of any passive fund flagging up ethical or ESG credentials: a name can cover a multitude of sins.

With more investors looking for funds with an ethical mandate, it is increasingly important to differentiate between those that truly embed a sustainable approach and those merely paying lip service to it.

Haydon Waldek is a chartered financial planner and partner of Castlefield. Castlefield is a trading name of Castlefield Advisory Partners Limited (CAP) and a registered trademark and the property of Castlefield Partners Limited.

For the full Winners and Spinners report from Castlefield click here.