This fund is sustainable: true or false?

Written by Rebecca O'Connor on 9th Oct 2017

Some so-called “sustainable” funds invest in companies with poor environmental and social records, according to analysis.

The Castlefield “Winners and Spinners” report reveals which ethical and sustainable funds are still investing in tobacco and environmentally damaging extractive companies.

A spokesperson for Castlefield says: “As the market grows, it is increasingly important to differentiate between those funds genuinely responding to customer demand for a sustainable approach and those which use terms like ethical, Socially Responsible Investment (SRI) or stewardship in their name but include companies such as British American Tobacco or Shell in their key holdings.”

Putting the word “ethical” or “sustainable” in the name of a fund does not make it so.

Castlefield’s Winners:

FUND SIZE (AS AT 31/08/17) FUND CUMULATIVE PERFORMANCE*
1YR 3YR 5YR
£173.00m FP WHEB Sustainability Fund (C Acc) 12.5 51.0 99.3
£365.16m Liontrust UK Ethical (2 Acc) 18.1 44.0 90.1
£884.76m Rathbone Ethical Bond Fund (Inst Inc) 6.5 20.5 43.8

*(Source: FE Trustnet as at 26/09/17)

 

And the Spinners…

FUND SIZE (AS AT 31/08/17) FUND CUMULATIVE PERFORMANCE*
1YR 3YR 5YR
€565.56m The Vanguard SRI European Stock Fund (Acc GBP) 17.5 35.6 75.6
£150.86m (26/09/17) Aberdeen Ethical World Equity Fund (I Acc) 11.1 25.6 51.2
£485.66m Friends Life Stewardship Fund (NGP) 9.7 23.1 65.0

*(Source: FE Trustnet as at 26/09/17)

Past performance is not a reliable indicator of future returns

 

Castlefield said that this year’s three winners “not only impress with the positive social and environmental impacts of their portfolios, but also with their returns.”

The three-year returns of the winners as a whole significantly outperform those of the ‘spinners’. For example, £1,000 invested equally in the top three winner funds in 2014 would now have returned £1,379, compared to just £1,266 in the three spinners1.

In the case of Liontrust, a focus on companies that improve people’s lives through medical, technological, educational, environmental or systemic advances is paying impressive dividends with three year returns of 42.8 per cent. Castlefield said WHEB also deserves praise for its continued appearance in the ‘winners’ list over several years. WHEB’s recent Impact Report, for example, calculated that for each million pounds invested the fund helped avoid 1,600 tonnes of CO2e, diverted 140 tonnes of waste from landfill and treated 1.6m litres of waste water.

Spinners give ethical and sustainable investing a bad name

In contrast, Castlefield said “it is essential to call out funds that are “responsible” in name alone as it risks watering down the importance of responsible investment as a whole. Putting the word “ethical” or “sustainable” in the name of a fund does not make it so.”

Some of the reasons this year’s ‘spinners’ have been chosen include:

  • The Vanguard SRI European Stock fund – includes both British American Tobacco (BAT) and Royal Dutch Shell in its top ten holdings. BAT is a manufacturer of a product, tobacco, that kills more than seven million people every year, and both BAT and Shell have been accused of human rights violations in their operations or supply chain. We don’t believe either of these companies meet the expectations of customers looking for an ‘SRI’ fund.
  • The Aberdeen Ethical World Equity Fund – has EOG Resources as its third biggest holding. EOG is a crude oil and natural gas firm that has faced accusations of illegal burying of waste and excessive flaring (the deliberate open-air burning of natural gas) which threatens both the environment and the livelihoods and health of surrounding communities.
  • The Friends Life Stewardship Fund (managed by Schroders) – counts mining giants Rio Tinto and BHP Billiton amongst its holdings. This is despite several third-party concerns about Rio Tinto’s activities in the ecologically sensitive South Gobi Desert and BHP’s involvement in the coal industry (which represents 14.5% of overall company revenue). In particular, it is hard to see how the fund’s investment policy to exclude companies, “with any involvement in uranium extraction” is compatible with investment in Rio Tinto – one of the world’s largest producers of uranium.

You can view the full Castlefield Winners & Spinners report here.



Which impact funds get the thumbs up in the latest Good Investment Review, from 3D Investing and Good With Money? Find out here.


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References

  1. Data from FE
  2. http://www.eurosif.org/wp-content/uploads/2016/11/SRI-study-2016-LR-.pdf
  3. https://www.edie.net/library/A-lighter-shade-of-green—what-does-ethical-investment-entail/4804