How to build a responsible fund portfolio

Responsible funds from different sectors

• Global tracker – wide ranging investments in global stock markets

  We think a global ESG (environmental, social and governance) tracker fund could act as part of the backbone for lots of responsible portfolios.

  The Legal & General Future World ESG Developed Index invests in around 1,400 companies across the globe and aims to track the Solactive L&G ESG Developed Markets Index.

  The fund won't invest in companies that make controversial weapons (like cluster munitions, anti-personnel mines and chemical and biological weapons), and those with significant involvement in tobacco, thermal coal, oil sands or civilian weapons. It also avoids persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption).

  The fund also aims to achieve at least a 7% reduction in carbon emissions per year until 2050.

  Investors should note the fund invests in smaller companies, which adds risk.

  Find out more about Legal & General Future World ESG Developed Index, including charges

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• UK – no place like home

  As UK investors, we think it generally makes sense to pay extra attention to our home market. When we spend in sterling, we should usually hold some investments in sterling too. That way we don’t have to worry about changes in exchange rates.

  We think Aegon Ethical Equity is a good option for a responsible investment fund focusing on the UK stock market.

  The fund's been managed by Audrey Ryan for 25 years. She uses a strict approach and won’t invest in companies some might deem unethical, including those that derive a significant proportion of their revenues from areas like tobacco, alcohol and munitions.

  The manager aims to identify and understand the key environmental, social and governance risks of each company, industry and sector she invests in. She believes companies that lead the way in governance and sustainability tend to outperform over the long run.

  Many of the UK’s largest companies are excluded from the fund's investment universe for ethical reasons. This means there’s a focus on higher-risk small and medium-sized companies. The fund also holds shares in Hargreaves Lansdown plc.

  Find out more about Aegon Ethical Equity, including charges

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  The Ninety One UK Sustainable Equity fund places a greater emphasis on sustainability. Manager Matthew Evans then assesses companies across three pillars – financial strength and sustainability, the impact of its operations and the impacts of its products or services. The manager takes this approach because he believes the impacts that companies have, both positive and negative, will become increasingly important in the way they’re valued in the future.

  Companies involved in controversial weapons, and those that derive a large proportion of their revenues from tobacco, oil & gas and coal are excluded. Violators of the UN Global Compact principles (a UN pact on human rights, labour, the environment and anti-corruption) are also excluded.

  Investors should note the manager’s flexibility to invest in smaller companies and derivatives adds risk.

  Find out more about Ninety One UK Sustainable Equity, including charges

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• Options for income

  The UK has also been a world-renowned income market, so if income is a priority, investors could consider investing in a UK-focused responsible income fund.

  The Janus Henderson UK Responsible Income fund aims to give a good level of income, alongside capital growth over the long term. Andrew Jones has been at the helm since January 2012 and has almost 25 years’ experience managing UK equity income funds.

  The fund won’t invest in areas that some investors consider unethical, such as companies with significant involvement in alcohol, armaments, gambling, non-medical animal testing, nuclear power, tobacco and fossil fuel power generation (although companies generating power from natural gas may be allowed if the company's strategy includes a clear plan to transition to renewable energy power generation). All investments must also be compliant with the UN Global Compact.

  Before adding any company to the fund, Jones carries out detailed ESG analysis, engaging with company managers if he feels there’s room for improvement. The manager’s flexibility to invest in smaller companies adds risk. Please note the fund takes charges from capital which could boost the income but reduces the potential for capital growth.

  Find out more about Janus Henderson UK Responsible Income, including charges

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  The Troy Trojan Ethical Income fund is a more conservative option for income. It’s managed by Hugo Ure, who leverages the skills and expertise of Troy’s highly regarded Equity Income team. The team aims to shelter investors’ money from the worst stock market falls, while increasing its value and paying a rising income over the long term.

  The manager won’t invest in companies deemed unethical, including those with significant involvement in armaments, tobacco, pornography, fossil fuels, alcohol, gambling and high interest lending. He also carries out ESG analysis on each company to get a deeper understanding of the risks. Where he feels improvements can be made, he’ll engage with the company.

  The manager’s flexibility to invest in smaller companies and derivatives adds risk. Please note the fund takes charges from capital which could boost the income but reduces the potential for capital growth.

  Find out more about Troy Trojan Ethical Income, including charges

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• Mixed – a mixed asset diversifier

  BNY Mellon Sustainable Real Return could also be a good option as part of the core section of a portfolio. It’s more conservative in its approach, so adding this fund to the mix could help reduce risk.

  The fund aims to make money in a variety of market conditions. The fund's 'return-seeking core' invests mainly in the shares and bonds of well-run, financially secure companies. They think these companies have a unique set of advantages over their competitors. They also consider how well those companies manage their impact on the environment and society.

  The rest of the portfolio is invested in government bonds, commodities and cash, with the aim to dampen market ups and downs. The managers also have the flexibility to invest in emerging markets, high-yield bonds and derivatives which, if used, adds risk.

  The fund's sustainable 'red lines' make sure companies that violate the UN Global Compact Principles and those incompatible with the aim of limiting global warming to 2°C aren’t considered. It also won't invest in any company that makes more than 10% of its revenues from tobacco.

  Find out more about BNY Mellon Sustainable Real Return, including charges

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• Fixed income – what about bonds?

  Bonds are generally less volatile than shares – that means they normally don’t have as many ups and downs – so they can help with diversification. They also tend to grow more steadily over the long term. Remember it’s still possible to get back less than you invest.

  We think the Liontrust Sustainable Future Corporate Bond fund could be a reasonable option for investing in corporate bonds. Managers Kenny Watson, Aitken Ross, Jack Willis and Connor Godsell form a view on the outlook of the economy and then invest in bonds issued by companies that can hopefully thrive in that environment.

  The managers believe companies whose products benefit the environment and society, and that manage their own impacts well, have the potential to do well over the long term. Their flexibility to invest in emerging markets and derivatives adds risk.

  Find out more about Liontrust Sustainable Future Corporate Bond, including charges

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  Another option for investing in corporate bonds could be Fidelity Sustainable MoneyBuilder Income. Supported by a large in-house research team, the managers aim to generate an attractive income from higher-quality investment-grade bonds without taking excessive risks.

  At least 70% invests in bonds issued by companies with sustainable characteristics, as defined by both Fidelity’s proprietary Sustainability Ratings and external ESG scores. The remainder invests in issuers demonstrating improving sustainable characteristics, and the managers will engage with these companies to agree improvement milestones and timescales.

  The team formalised integration of ESG analysis in 2022. This means increased levels of engagement and the exclusion of companies with significant involvement in controversial areas, such as weapons, tobacco, thermal coal and gambling. The managers also avoid companies violating the UN Global Compact.

  The managers have the flexibility to invest in high yield and unrated bonds, as well as derivatives, which, if used, adds risk.

  Find out more about Fidelity Sustainable Money Builder Income, including charges

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• Global managed – actively investing in global stock markets

  The Stewart Investors Worldwide Sustainability fund could be a good option to add a satellite to the mix. Manager Nick Edgerton invests in companies of all sizes, including higher-risk smaller ones. The emphasis is on companies that have a positive impact on society, the environment and health.

  The fund excludes companies with significant involvement in controversial areas, such as nuclear power, tobacco, alcohol and gambling. Investors should note the fund has investments in emerging markets and is a concentrated portfolio. Both of these factors increase risk.

  Find out more about Stewart Investors Worldwide Sustainability, including charges

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  Some investors want to feel they're making a positive difference to the environment and society through their investments. Impact funds measure and report back on the positive impact they set out to make on the environment and society.

  We think WHEB Sustainability could be a sensible option.The team behind it invests based on nine sustainable investment themes. These range from resource efficiency and sustainable transport to education and wellbeing.

  Every investment into the fund makes a positive difference. £10,000 invested into the fund throughout 2023 helped:

  • Generate 3 MWh of renewable energy
  • Avoid 2 tons of carbon dioxide emissions
  • Save 11,000 litres of waste water
  • Treat 28,000 litres of waste water for reuse
  • Provide 1 day of tertiary education
  • Improve the overall wellbeing of one person

  Investors should note that the portfolio looks very different to the broader global stock market, so we expect it to perform differently too. The fund's focus towards small and medium-sized companies adds risk, as does its flexibility to invest in emerging markets.

  Find out more about WHEB Sustainability, including charges

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• Asia and emerging markets – looking for great leadership

  Asia and emerging markets offer the potential for greater long-term returns, but they’re riskier than developed ones, so investments here should usually form just a small part of a well-diversified portfolio.

  The FSSA Asia Focus fund is managed by Martin Lau and his team who we hold in high regard. They have a wealth of experience investing in the Asia Pacific region, including higher-risk emerging markets. They look for companies with strong cash flows, an ability to keep costs under control and high standards of company management.

  The team’s investment philosophy is founded on stewardship. When they make an investment, they see themselves as part owners of the business. So they engage with companies to make sure they’re run in a way that’ll benefit all shareholders, and also consider environmental, labour and other governance issues.

  Find out more about FSSA Asia Focus, including charges

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  The Stewart Investors Indian Subcontinent Sustainability fund focuses more on India and Bangladesh, which are higher-risk emerging markets. Managers Sashi Reddy and David Gait invest in companies they believe could benefit from and contribute to the sustainable development of the countries they’re based in.

  Analysing environmental, social and governance information helps them understand more about the quality of companies. They think their long-term investment horizon makes sustainability even more important. The fund's investments in smaller companies add risk.

  Find out more about Stewart Investors Indian Subcontinent Sustainability, including charges

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