Younger generations are leading the growth in assets of ethical funds as numbers show responsible investing does not mean sacrifice of performance
Research by AJ Bell shows that over the past year almost £3bn of money has been invested into ethical funds.
Part of the growth in interest in greener portfolios, the firm says, comes from greater concern amongst younger generations around ethical and environmental investing than previous generations.
“Our own customer research shows that millennials are more likely to rank ethical investing as ‘fairly important’ or ‘important’ than Baby Boomers. It’s also likely that as people increasingly become more environmentally conscious in their lives this will filter through to their investments,” says Laura Suter, personal finance analyst at investment platform AJ Bell.
“The argument against ethical funds has usually been that going green comes at a cost – with ESG funds likely to underperform their mainstream peers. It’s always difficult to compare returns on ethical or ESG funds because they cover such a broad church of investments.
“However, when you look at the top 10 funds by inflows and compare each one to their benchmark return over five years, all but one that have five-year figures have outperformed their respective benchmark. The only one that didn’t was Hermes Global Equity, which narrowly missed the returns of the MSCI World over that period.
“Some have impressively beaten their benchmark, such as the Liontrust Sustainable Future Global Growth fund, which returned more than 104% over five years compared to the MSCI AC World index return of 86%.”
However, Sauter says investors need to be aware that as investor interest in ESG funds grows, they need to be wary of ‘greenwashing’ of funds, where asset managers attempt to capture some of the interest and inflows by badging a fund as in some way ‘ethical’.
“The onus is on investors to really dig into what the fund manager is doing to incorporate ESG into the portfolio selection, or whether they are just paying lip service to the idea,” she says.