Advertisement
UK markets closed
  • FTSE 100

    8,155.72
    -49.17 (-0.60%)
     
  • FTSE 250

    21,067.68
    -166.48 (-0.78%)
     
  • AIM

    784.13
    -3.54 (-0.45%)
     
  • GBP/EUR

    1.1866
    -0.0009 (-0.08%)
     
  • GBP/USD

    1.2910
    -0.0037 (-0.29%)
     
  • Bitcoin GBP

    51,865.00
    +2,298.30 (+4.64%)
     
  • CMC Crypto 200

    1,383.60
    +52.70 (+4.13%)
     
  • S&P 500

    5,505.00
    -39.59 (-0.71%)
     
  • DOW

    40,287.53
    -377.49 (-0.93%)
     
  • CRUDE OIL

    80.25
    -2.57 (-3.10%)
     
  • GOLD FUTURES

    2,402.80
    -53.60 (-2.18%)
     
  • NIKKEI 225

    40,063.79
    -62.56 (-0.16%)
     
  • HANG SENG

    17,417.68
    -360.73 (-2.03%)
     
  • DAX

    18,171.93
    -182.83 (-1.00%)
     
  • CAC 40

    7,534.52
    -52.03 (-0.69%)
     

Is selling my ‘ethical’ funds the right thing to do?

Imogen Tew
I can't remember precisely why I chose to invest a tenth of my portfolio into sustainable funds - Heathcliff O'Malley

Telegraph Money’s new Millennial Investor Imogen Tew, 28, has a new baby and hopes to buy a bigger house. After years of neglecting her portfolio, she needs help to become a better investor. Can you offer her any words of wisdom?

A few days after I first laid my investment portfolio bare to the world in this very column, a friend messaged me with his typically blunt, outspoken opinion.

“I don’t understand why you have two sustainable funds?,” he asked. “Is it an ethical thing? If so, it’s clearly just a guilt purchase… Surely you need to go fully green or not at all.”

Ouch. He’s not wrong, of course. I can’t remember precisely why I chose to invest a tenth of my portfolio into sustainable funds – split between the Stewart Leaders in Sustainability fund and Liontrust’s Sustainable Future fund – but seeing as the rest of my Isa is invested across the whole market, it clearly wasn’t some kind of earth-saving moral stand.

ADVERTISEMENT

Instead, I think it was part-guilt purchase, part-thinking it was a good investment decision. Since “ESG’’ investing (a short-hand for an investing style that takes environmental, social and governance factors into account) began rising in popularity in the late 2010s, we have heard incessantly from fund managers that not only is ESG investing a “good thing”, but also that it will produce higher returns than standard funds.

For my portfolio rethink, I’ve had to unpick these arguments.

The basic idea behind reason one (guilt-purchase/hoping to help the world) is that by investing in companies that are “sustainable”, you move money towards the companies doing “good things” and take money away from the companies doing “bad things”.

Today, my main issue with this train of thought is defining a “bad company” doing “bad things”.

Do you avoid energy companies simply because they are energy companies, for example, or do you accept that they are likely to play a fundamental role in the shift to renewable energy going forward and need financing to do so?

And am I relying on a fund manager’s own opinion of “good” and “bad”? As you might expect, it’s often hard to pin down exactly how an investment company decides what makes the cut in the fund literature – this sort of technical detail doesn’t often help sales.

It also ignores the fact that you do not exist in a vacuum, and other investors will buy the shares you sell. If investors are fleeing a stock due to ESG concerns, then these investors will likely buy the shares at a low and make a profit when they ultimately increase to a fair value.

In terms of higher returns (as I understand it and how fund managers sold it to me), the hope is that companies that are “sustainable” will perform better in the long run because they are the companies that will succeed as the world moves towards a more sustainable future, and will become increasingly attractive to more and more investors, pushing up the price.

Has it paid off for me so far? As you might expect, the sustainable funds have sometimes overperformed and sometimes not, depending on the market at the time.

In my portfolio, the sustainable funds have been middling, up 1pc and down 2pc respectively over the past three years. This is better than some of my more risky bets such as China and UK small-caps, but nowhere near the returns produced by standard global tracker funds – up 24 and 17pc.

On a wider scale, I’m less inclined to back ESG as a source of higher returns. If using an ESG framework was a way to produce higher returns, then surely fund managers (many of whom rely on good returns for their bonus pay and job security) would already be using this data in their work and “ESG” wouldn’t be anything to sing about as an investment style.

So if I no longer buy the “higher returns” argument, and have concerns over whether the way ESG companies are defined and managed within an investment framework will actually align with my morals, then should I still be investing in sustainable funds?

For me, the only argument for someone wanting to be an “ESG investor” that sticks is a personal one – you simply do not want your money to go towards certain industries or actively want your money to go to companies working towards a certain type of future, but do so with the understanding that it isn’t going to have any real-world impact.

In fact, the idea that where you move your money can have an effect on something as long-term and wide-reaching as climate change now seems little more than an advertising plug for investment companies.

Without the real-world impact, this argument doesn’t quite cut the mustard for me. As far as the portfolio shake up goes, then, these funds are on the sell list.