Thanks for asking these important questions Caroline. The first thing you might be interested to know is that there are no rules dictating what is or is not a ‘green’ or ‘ethical’ fund. Because different funds offer different approaches to suit different types of investor there are almost as many approaches as there are funds.
As with any fund, the approach they take influences where they invest and therefore how they perform. So yes, in essence, ethical funds are affected by their ethical strategies which shape where they invest. The question therefore is – how different are they from other funds that they might sensibly be compared with and is the ‘difference’ a good thing or a bad thing? Unfortunately it is really difficult to generalise about these points as the funds are so diverse.
This can make it hard to generalise about performance because, at any given time, some funds may be doing well and others may be doing less well. In addition, the performance of an individual fund (or groups of similar funds) will vary over time - dependent on how market sentiment and many other factors are affecting the types of companies the fund invests in - and this changes all the time.
This can be magnified for those green or ethical funds which have very specific strategies which limits where they can invest as that reduces the fund managers ‘room to manoeuvre’ when the companies the fund invests in are not performing so well. What’s more, green and ethical funds often invest more heavily than other funds in smaller companies because, for many funds, larger companies tend not to fit their green/ethical approaches and smaller companies are often hit hardest in a downturn. On the upside, when markets recover, it has tended to be the better, smaller companies that lead the recovery – so the 'smaller company' factor can cancel itself out over time. Indeed, on occasions, this can work in an investor’s favour if they are fortunate with their timing.
In terms of considering whether or not there are potential longer term performance benefits, you might start by thinking about those issues that set green and ethical funds aside from other funds - such as environmental issues. Given that climate change in particular is becoming so important to business, you might like to consider whether or not this issue should form part of an investment strategy. You might then consider other often highly relevant issues, for example biodiversity, pollution, health and safety, relations with suppliers etc, that can affect how well companies perform.
You can then take a view as to whether or not this should form part of your decision making. If you feel that that you may be better off investing some money in a fund that has a good grasp of the business implications of these issues and are able to invest for the medium to longer term, you would be well advised to seek the help of an Independent Financial Adviser. An IFA could help you to find a fund that suits your personal situation by asking you about your personal situation and your investment goals and then researching funds for you.
To find an IFA with expertise in this area you might like to visit Unbiased.co.uk, where you have the option to tick a box online saying you are looking for an IFA with expertise in ethical investment. If you want to do some background research about the different green and ethical criteria you may like to take a look at Your ethical money. I hope this helps.
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