Portfolio makeover: How to work out what to ditch and what to keep if you want to invest more sustainably
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Many people have good intentions to invest ethically, but are hesitant to take radical action with an existing portfolio they may have built and nurtured over many years.

If you are interested in sustainable investing, but aren’t sure what to ditch and keep, or how to find and probe decent replacement funds and trusts, we have asked financial experts to explain what steps to take.

There is much debate about whether it is better to divest from fossil fuel and other non-sustainable investments, or to stick with them and try to influence company policies with your vote. 

It’s a good idea to make up your mind where you stand on this as it will inform any review of your investments, and decisions on how thoroughly you want to overhaul them.

Portfolio makeover: How to work out what to ditch and what to keep if you want to invest more sustainably

Portfolio makeover: How to work out what to ditch and what to keep if you want to invest more sustainably

1. Review your current holdings

You should ask yourself the following questions when considering a ‘green’ makeover of your funds, suggests Fidelity International’s investment director Maike Currie.

– Do you personally agree with the companies your funds are invested in?

– Have the fund managers held companies to account through engagement and voting activities?

– Are there certain companies or industries you want to exclude completely?

‘The answers to these questions should inform both your head and your heart, enabling you to decide whether the fund is right for you,’ she says.

Currie says you should examine the factsheets of the funds you are currently invested in.

‘These will provide an in-depth look into the fund, including information on the top holdings, regions and sustainability ratings and characteristics.

‘Do note however that there can be a lag between the latest fund factsheet and the fund’s most current holdings.’

2. Consider the broader investing outlook

In the near term, ‘environment social and governance’ funds are facing a few performance headwinds, says Jason Hollands, managing director at investing platform Bestinvest.

He highlights soaring oil and commodity prices, a rally in defence stocks as European governments pledge to ratchet up spending, and the tobacco sector being one of the few areas to generate positive returns this year.

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‘The average ESG global equity fund also has around 21 per cent in technology stocks, which have struggled since the start of year as the markets have repriced the present value of future earnings on the back of higher inflation and rising borrowing costs,’ says Hollands.

‘But in spite of these current near term factors, increased numbers of long-term investors do want their money to be invested sustainably.

‘In fact according to Investment Association data, the share of total UK industry asset under management in ESG funds has grown from 2.7 per cent in the first quarter of 2020 to 5.6 per cent in the fourth quarter of 2021.’

Hollands adds: ‘Ultimately much higher prices for oil and gas support the case for both reducing reliance on fossil fuels and improving energy efficiency, alongside the drive to achieve net zero carbon emissions by 2050.’

3. Explore options on your investing platform or in your work pension

‘While ethical, responsible or green funds used to be quite niche, these days they are far more common, allowing investors lots of options to populate diverse portfolios,’ says Rob Morgan, chief analyst at Charles Stanley Direct.

‘If you are using an investment platform, you will have plenty of options from different providers. If you are investing via, for instance, a workplace pension then there may be a more limited number available.

What do cryptic fund names actually mean? 

Sustainable, responsible, alpha, focus, dynamic, optimal… Read our jargon buster here. 

‘Funds use different labels including ethical, responsible, stewardship, green, positive impact and sustainable.’ 

Currie says: ‘Once you have determined the funds you no longer want to invest in, review your alternative ESG options.’

Fidelity Personal Investing has an ESG fund tool called the ‘Sustainable Investment Finder’ which helps investors search for the ones that meet their goals on sustainability, social action, risk and potential return. 

‘As you would with any investing decision, it’s worth conducting this process within the context of your overall investing objectives, keeping in mind how any decisions you make could impact your risk appetite and the time you plan to remain invested,’ adds Currie.

Hollands notes: ‘Looking at UK domiciled funds with intentional ESG characteristics, almost two third of all such funds were launched in the last five years despite ESG funds being a feature of the UK market for nearly four decades.

‘While it is good to see that investors who want their money invested responsibly now have considerably more choice available, this does create the challenge that a lot of funds have short track records and have never really been tested across different market environments or economic cycles.’

4. Make sure you understand the goals of ESG funds

You need to understand the philosophy of a responsible fund because they vary quite a bit, says Morgan.

‘They can either mainly exclude areas that are deemed off limits such as tobacco or arms or focus on the positive by investing in companies helping solve social or environmental problems – or a bit of both.

‘You can assess whether the values of the fund manager meet with your own by taking a look at the fund literature.’

Hollands says the lack of commonality in policies and approaches can be a challenge for investors researching ESG funds.

Give your portfolio a health check 

‘Policies can differ considerably between funds, varying from selecting companies who are considered “best in class” in their industries on ESG criteria, to funds that take a much more rigorous approach to screening businesses that go far beyond a tick box approach.

‘It is especially important for investors to determine what their red-line issues are and delve beneath the bonnet to make sure that a fund’s policies meet their needs. Make sure the approach on a particular issue is consistent with your principles.’

5. Watch the level of risk you are taking

‘If you switch into a greener investment take care it meets with your objectives and risk,’ warns Morgan.

‘Funds adopting ESG and prioritising responsible investments often end up backing more expensive businesses deemed high quality or innovative growth areas such as alternative energy and healthcare solutions.

‘These can be more volatile in the shorter term.’

He says that recently less expensive areas such as fossil fuels and mining have been more resilient to difficult markets and, in the short term at least, stand to benefit from rising commodity prices.

‘Using only green funds may mean sacrificing some diversification, and even switching between funds in the same sector may mean taking on a different risk level.’

6. Keep reviewing your holdings

‘As the world around us is constantly changing, it’s worth reviewing your ESG investments on a regular basis to make sure they continue to align with your preferences and are suitability weighted towards your ESG goals,’ says Currie. 

What funds and trusts could you consider to ‘green’ your portfolio?

What does responsible investing jargon mean? 

Two thirds of savers want to invest responsibly but are baffled by jargon: How to tell ESG from SRI and impact investing… and spot greenwashing here.

Jason Hollands, managing director at investing platform Bestinvest, offers the following tips.

FP WHEB Sustainability – Ongoing charge 1.03 per cent 

‘WHEB Asset Management may not be a household name, but they are specialists in responsible investing: it is all they do,’ says Hollands.

‘The fund invests across nine themes: environmental services, resource efficiency, water management, sustainable transport, cleaner energy, safety, health, wellbeing and education.

‘The fund has a predominantly positive screening focus, but will also exclude all “sin” sectors such as alcohol, tobacco, gambling, pornography and weapons. It is also fossil fuel-free.’

He says WHEB focuses on companies offering solutions to challenges, not just those with good corporate social responsibility reports, and an independent committee reviews holdings each quarter to ensure investment policies are followed.

WHEB also publishes an impact assessment report, to measure the aggregate effect of the companies in the portfolio on a range of criteria, adds Hollands.

BMO Responsible Global Equity – Ongoing charge 0.80 per cent 

The fund invests worldwide in companies making a positive contribution to society and the environment, while avoiding those with damaging or unsustainable business practices, explains Hollands.

Looking to go green? 

Investing platform Interactive Investor unveils its 20 most-bought sustainable funds, trusts and ETFs in Isas here. 

‘Fund manager Jamie Jenkins is responsible for stock selection and portfolio construction, while ESG screening and engagement is the responsibility of the large governance and sustainable investment team at BMO (now part of Columbia Threadneedle),’ he says.

Meanwhile, the fund’s ESG policies and procedures are also reviewed quarterly by an independent council, presided over by the Archbishop of Canterbury.

‘We would describe this fund as following “mid green” ESG criteria, as its “invest, avoid and improve” philosophy means it includes companies aiming to improve their ESG characteristics as well as those whose ethical profiles are already strong.’

Impax Environmental Markets – Ongoing charge 0.95 per cent 

‘This London listed investment trust is market leader when it comes to investing in companies operating in the environmental and resource efficiency sectors,’ says Hollands.

‘It has a global briefing with around 51 per cent of the portfolio in the US, 33 per cent in Europe and 13 per cent in Asia.

‘Key sectors include resource efficiency and waste management, energy efficiency, water infrastructure, sustainable food and agriculture and alternative energy.’

Liontrust UK Ethical – Ongoing charge 0.79 per cent 

The former Alliance Trust ethical investing team moved to Liontrust in 2017, says Hollands.

‘Their key mantra is “investing for tomorrow, today”, so they look for companies that are early adaptors or innovators in their sectors.

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‘The team focuses on companies that aim to improve people’s quality of life (either through technology or healthcare advances), improve efficiency in the use of scarce resources, and improve safety and resilience.’

Hollands says the process also includes negative screening, with alcohol, animal testing, fossil fuels, gambling, nuclear, pornography, tobacco, and weapons currently excluded, which means the fund’s composition and performance can differ substantially from the UK market.

Rathbone Ethical Bond – Ongoing charge 0.65 per cent 

It is important to diversify a portfolio across different asset classes, and this fund invests in corporate bonds, say Hollands.

‘Bond issuers will be assessed against a set of positive and negative social and environmental criteria. A company will fail the negative screen if it is involved in any of the following areas: armaments, environmentally unsustainable activities, animal testing, tobacco, nuclear power, alcohol, pornography, and gambling.

‘But it must also show at least one positive aspect such as management of environmental impacts or human rights.

‘The ESG research is carried out by Rathbone Greenbank, the company’s ethical research division. Indeed, approval for investments must be given at a weekly meeting, by the whole ethical investment team.’

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