Sustainability has become one of the most popular investment themes over the past few years.
Figures from the Investment Association reveal that responsible funds have taken £6.7billion of investment in the first half of 2021. That is some £2.4billion more than the previous year.
As a result of this demand, there are now more opportunities than ever to invest in companies and funds focused on ESG – which stands for environmental, social and governance.
In the first half of this year, 21 ESG funds launched in the UK and 372 worldwide, according to Morningstar data.
Responsible funds have taken nearly £7bn in the first half of this year
However the over-saturation of the market means it can be difficult to distinguish what impact your ESG investment is potentially making.
We asked four fund pickers for their favourite green funds and trusts, covering everything from social impact to renewable energy.
Global ESG / sustainable
For investors who want exposure to global stocks there are plenty of ESG funds on offer, although lots tend to hold a lot of the same names like Tesla and renewable energy company Siemens Gamesa.
ETFs can be a good option for new investors – while some have relatively broad mandates, others focus on specific areas like energy, food or water.
These can fall in and out of favour and some experts claim ESG investing is inherently an active management process because of the research and due diligence necessary.
Rob Burgeman, investment manager at Brewin Dolphin
‘We suggest taking a more generalist approach, meaning you do not become fixated on the daily or weekly oscillations of individual stock prices and instead focus on the longer-term view,’ says Rob Burgeman, investment manager at Brewin Dolphin.
He picks out AXA WF Global Clean Economy Fund, managed by Amanda O’Toole, as a strong global ESG fund.
‘[It] focusses its investment strategy on a pillar of companies poised to benefit from the direction of travel we appear to be on. Its holdings range from businesses focused on recycles to water, energy, and food,’ he says.
Its top holdings include the renewable energy group Siemens Gamesa, food company Darling Ingredients and agricultural machinery supplier Deere & Co.
It has returned 24.11 per cent in the past year with an ongoing charge of 1.06 per cent.
Burgeman also notes Pictet Global Environmental Opportunities as another global sustainability-themed fund option.
Pictet is a fund house which specialises in sustainable investment, and this fund, run by Gabriel Micheli and Luciano Diana, invests in a range of largely US-based life sciences, water and engineering companies.
Its holdings include the life sciences group Thermo Fisher Scientific, semiconductor company Synopsys and Autodesk, which provides software for construction, architecture and engineering.
In the past year it has posted total returns of 19.2 per cent, slightly below the IA Global sector average.
UK ESG / sustainable
In the UK, Liontrust Sustainable Future UK Growth is a particular favourite of investment managers.
Liontrust has built up a reputation as a leader in ESG, having launched its Sustainable Future funds back in 2001.
Hawksmoor senior fund analyst James Clark
‘Hawksmoor invests in three of the Liontrust Sustainable Future range of funds and we hold the team in high regard,’ says senior fund analyst James Clark.
‘This growth-orientated UK equity fund focuses on three broad themes – ‘more efficient’, ‘healthier and with higher quality of life’ and ‘safer and more resilient’ – with around twenty sub-themes, and companies must fit into at least one theme in order to be included in the portfolio.’
‘The fund is very well-established under lead manager Peter Michaelis with co-manager Martyn Jones having come up through the ranks from an analyst position.
Liontrust Sustainable Future UK Growth has a strong performance record, including protecting capital on the downside in weaker equity market conditions (e.g. 2018 and 2020) but this does not come at the expense of outperforming in stronger markets (e.g. 2019),’ he adds.
The fund avoids exposure to miners, oil companies and banks and its top holdings include Legal & General, Unilever and GlaxoSmithKline.
Over the long term this strategy has worked – it has delivered a 73.59 per cent total return over 5 years against the FTSE All Share’s 25.98 per cent.
But Burgeman notes ‘in the shorter term, that has reversed as banks have come back into favour and the oil price has increased.’
Social impact investing
Impact has become another buzzword in ESG investment. While some funds can use it to mean environmental, it has generally tended to focus more on funds investing in social impact projects.
BSC Schroders Impact Trust is the first trust dedicated entirely to impact investing to list on a stock exchange. It focuses on high impact housing, debt for social enterprises and social outcomes contracts.
It was launched by Big Society Capital, a leading social impact investor, in partnership with Schroders last December.
As of 30 June, the trust had deployed two thirds of its £75million IPO funds into 23 investments. The NAV total return for this period was 6.1 per cent.
It is set to pay a maiden dividend of a 0.57 pence per share.
‘Obtaining highly impactful private market exposure has previously been the preserve of institutional investors – due to high investment minimums and partnership fund structures,’ says Daniel Bland, head of Sustainable Investment Management at EQ Investors.
‘The launch of this unique social impact trust provides access to a diverse mix of social impact investments at a time when social issues are understandably at the forefront.’
‘One of the reasons we’re excited about the Schroders Big Society Capital Trust is that the strategy targets several high impact themes, working with experts in their respective fields. Ordinarily these third parties are inaccessible to most investors.’
‘These underlying managers specialise in areas such as high impact social housing, investment in social enterprises to directly finance community-based projects, and social outcome contracts which are exclusively accessible to retail investors through this trust.’
FP WHEB Sustainability Fund is known for having one of the most comprehensive approaches.
WHEB’s head of research Seb Beloe has been described as ‘the Cristiano Ronaldo of sustainable investment’,
James Clark, senior fund analyst at Hawksmoor
Its top holdings include health company Agilent Technologies and Royal DSM, which aims to improve the efficiency of global food supply chains. Its three and five year returns have come in at 11.06 per cent and 11.36 per cent respectively.
The fund is managed by WHEB Asset Management, a small boutique solely focused on managing an ESG strategy.
It has an independent advisory committee to review and scrutinise its holdings, and publishes how members vote and reports on the impact made by the companies in its portfolio.
‘The WHEB team are sustainable investment specialists – this is all they do, and they have done it for quite a long time now, with this strategy having launched in June 2009.
‘I have heard WHEB’s head of research Seb Beloe described as “the Cristiano Ronaldo of sustainable investment”, whilst lead manager Ted Franks is also very highly regarded,’ says Clark.
The portfolio covers both large and small cap companies although has a bias towards medium-sized companies.
‘The team are conscious of this bias plus the tilt towards high quality companies, so they minimise one further element of risk by maintaining the fund’s geographic weightings at very similar levels to those of its MSCI World benchmark – they want performance to be driven by their themes and investee companies.’
‘As you would expect, impact reporting is very comprehensive, which helps WHEB Sustainability to stand out in what we regard to be the best cohort of funds available to sustainably-minded investors (i.e. sustainable global equity funds).’
Environmental / Green
Arguably the most popular focus for conscious investors is the environment. While a lot of sustainable funds try to incorporate it into their strategy, there are only a handful that are solely focused on the environment.
Ninety One Global Environment Fund, run by Deidre Cooper and Graeme Baker, is a popular pick among managers. It targets businesses that will benefit from decarbonisation trends.
Its top holdings include Nextera Energy, chemical company Croda, Trane Technologies, which makes heating and ventilation systems, and electric utility firm Iberdrola.
‘The fund is included within our Responsible Investment ‘Advance’ portfolios, which look to invest in companies that either have a ‘solution’ to the environmental issues we are facing or is a company that is transitioning to becoming a ‘responsible business’,’ says Isobel Gingell, investment director at Brooks Macdonald.
Isobell Gingell, investment director at Brooks Macdonald
‘We expect that there will be a rapid increase in businesses coming to the market that provide a decarbonisation solution and it is a major theme for governments, as can be seen from Boris Johnson’s announcement that all electricity in the UK should be produced from clean sources by 2035.’
Impax Environmental Markets is the UK’s largest environmental investment trust, and backs companies that focus on products or services to improve our impact on the environment.
It focuses on clean energy and energy efficiency, water treatment and pollution control, waste technology, and sustainable food.
Burgeman says: ‘It offers a slightly broader set of investments than the Baillie Gifford fund, with around 45 per cent of its holdings based in the US, and a good portion in The Netherlands and UK.
‘Many of these companies are not household names, but this is precisely what can make it a good foil for other investments in an area where there can be little differentiation between funds.’
‘An alternative could be to consider the fund house Impax Asset Management Group as an investment in itself.
‘It has a long and venerable pedigree in impact investing and has performed exceptionally well over the past decade as its specialism has become more mainstream.’
Finally, investors who want to invest specifically in renewable energy have plenty to choose from.
‘Both of these investment trusts currently provide decent yields of more than 5 per cent.
‘However, it is worth remembering that they provide exposure to a set of assets, which is more likely to perform like a utility,’ he says.
For something a little different, Clark suggests Gresham House Energy Storage which is an investment trust with a portfolio of battery storage facilities.
‘Gresham House Energy Storage earns revenue from three sources – Frequency Response (real-time power balancing for National Grid), Trading (taking advantage of intra-day price spreads) and Capacity Mechanism (long-term contracts to meet extremes of demand),’ he says.
‘The trust’s managers can switch the deployment of their battery storage facilities in order to optimise revenue generation.
‘Launched in November 2018, this trust targets 8 per cent total returns per year on a Net Asset Value basis, including a target dividend of 7p per share.
‘The trust is growing, having most recently (July 2021) raised £100m in a placing, and has a strong pipeline of investment opportunities in this exciting asset class.’
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