It's Good Money Week, where people are encouraged to think about the companies they put their money into and the investment choices they make. And this includes the issue of so-called ethical investing.

Research by investment company Architas has revealed that, over a 10-year period, 21 out of the 39 ethical equity funds on the market beat the Ftse All Share, including dividends reinvested.

The Ftse All Share has returned 58.8% over the five years to September 30, compared to the Ftse4Good UK benchmark of 63.5%.

The Ftse4Good Global benchmark has returned 111.1% over the same period compared to 95.6% for the MSCI World index.

Adrian Lowcock, investment director at Architas, says that while ethical funds lagged the broader market in 2016 as the oil price recovered and mining stocks rebounded from their lows, there are still good returns to be made.

‘[Ethical funds] bias towards mid and smaller companies can make them more volatile in the short term and focus on new technologies means the sector might be vulnerable in a downturn,’ he said.

‘Because ethical funds do tend to avoid certain sectors and companies it means that there can be periods of performance which will differ from the market and the fund could lag a broader market rally. However, ethical investing has evolved significantly over the past 10 years and today there are plenty of companies investors can choose from which actively endorse ethical investment.’

This is particularly true in the use of new technologies, which often allow companies to become more environmentally friendly and profitable at the same time.

How to invest ethically

There are three main ways to invest ethically.

First off there's sustainable investing, which targets companies which have socially-responsible business practices rather than a specific sector.

You can also go for environmental investments, looking at companies that integrate environmental issues into their investment strategies.

Finally there are negative ethical funds, which screen out investments that are not seen as ethical, such as alcohol, gambling, tobacco and arms.

Ethical equities

For investors wanting to gain access to ethical equities, Lowcock recommends Jupiter Ecology, managed by Charlie Thomas, which invests in global companies making a positive impact on the environment and providing solutions to environmental and social problems.

‘It applies an ethical overlay to stock selection and will not invest in companies which derive more than 10% of their turnover from unethical sectors including tobacco, weapons, alcohol or gambling,’ said Lowcock.

The fund has returned 82.6% over five years and 100.2% over 10 years. Although it has lagged the Ftse World benchmark over the time period, which has returned 107.4% and 134.8% respectively, it has beaten the Investment Association Global sector average of 80.1% and 91.1% respectively.

While it does not have a specific ethical mandate, Lowcock also recommended the Pictet Global MegaTrend Selection fund.

‘This fund does not have specific ethical requirements; instead it is looking to invest into eight long-term megatrends, many of which are closely linked with the dominant long-term ethical themes,’ he said.

Megatrend are global developments which will have an effect on the planet and its inhabitants over the very long term, such as access to water, clean energy and agriculture.

Lowcock said the fund manager Hans-Peter Portner invests in ‘a range of sub funds, each of which is individually managed by sector specialists’. 

[Read more: Four key things to consider to get better investing returns]

Ethical bonds

Darren Lloyd Thomas, managing director of independent financial adviser Thomas and Thomas, is an advocate of ethical investment and puts together ethically-focused portfolios for clients.

He has witnessed an increased appetite for ‘ethical, social and governance’ (ESG) investments and is a fan of ethical bond funds.

The top three ethical bond funds picks from Lloyd Thomas include Rathbones Ethical Bond, managed by Bryn Jones and Noelle Cazalis.

It has beaten the Investment Association Sterling Corporate Bond index over three and five years, returning 17.97% over three years compared to 17.14%, and 42.5% over five years compared to 36.89%.

The fund has an ongoing charges fee (OCF) of 0.69%, which compares to 0.86% on the Rathbones Strategic Bond fund.

Thomas also likes the Kames Ethical Corporate Bond, managed by Iain Buckle, which has returned almost in line over three and five years compared with the Investment Association Sterling Corporate Bond sector. Over three years it returned 19.5% compared to 18.6% and over five years returned 39.6% compared to 39.5%.

When it comes to cost, the Kames ethical fund has an OCF of 0.55% compared to the Kames Sterling Corporate Bond fund at 0.54%.

His third pick is Standard Life Investments Ethical Corporate Bond. The Mark Munro-managed fund has returned in line with the Sterling Corporate Bond sector over one, three and five years. Over one year it returned 9.6% compared to 9.5%; three years 19.7% compared to 18.8%; and five years 42.9% compared to 38.3%.

Once again, the difference in charges is negligible when compared to a regular bond fund. The ethical fund has an OCF of 0.66% compared to 0.65% for the SLI Investment Grade Corporate Bond fund.

Thomas said each of the three bond funds ‘cost around 0.80% per year on platforms’.

He added that tracker funds are one solution to gaining ethical exposure, and are also cheaper at around 0.3%, although he isn’t a fan of a fully passive investment strategy.

‘Clearly a bond tracker at 0.30% is going to be a cheaper price and will perform better when bonds are collectively going up,’ he said.

‘However, these ethically managed solutions benefit from a screening process that offers the investor some peace of mind that an effort is being made to invest ethically. Furthermore, managed bond funds historically fare better in a bond rout.

"This is because trackers dump bonds that are performing poorly at the wrong time and also buy the biggest debt by capitalisation at the very point you want to avoid doing that. I’m not against blending in a tracker – but I do love my ethically managed funds.’

The growth of ethical investing

Tanya Pein, investment specialist at In2 Planning, an independent financial adviser, said investors tended to lean towards ethical investments that are ‘the most profitable and the most personalised’.

She said of the 90 responsible investment funds on the market, both active and passive, ‘a large number... have shown returns significantly above industry benchmarks for some years now and this is set to continue’.

John Ditchfield, a partner at Castlefield Advisory Partners, predicted a rise in the number of people calling for ethical investments and a plethora of new investments for them to put money into.

‘There are a number of important thematic drivers for growth. These are: growing populations in urban areas seeking clean transport options; energy efficiency; water infrastructure and healthier lifestyles,’ he said.

He added that research has shown that investors applying a positive screen on their investments ‘may lead to stronger performance than applying a negative one’, encouraging people to look to more ethical investments in the search for returns.

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