Ethical funds such as Royal London Sustainable Leaders Trust, Rathbone Ethical Bond and Liontrust Sustainable Future Managed have beaten their more conventional peers and made some of the highest returns of their sector, FE data shows. 
Environmental, social and governance (ESG) is increasingly becoming a part of the mainstream as investors become more aware of issues such as climate change and want to use their portfolios to make a positive impact.
While total assets under management in ethical funds remains relatively small at around £20bn (or 1.6 per cent of the industry), monthly inflows have been steadily climbing and stood at £232m in August this year.
What’s more, a growing number of fund management companies are integrating ESG factors into their core investment processes while recent years have seen a surge in the number of fund launches with an ESG focus.
In the following article, we look at the ethical funds currently in the Investment Association universe and find out which are sitting at the top of their sectors over the three years to the end of September.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Of the 95 ethical funds that have a three-year track record and operate in a peer group where quartile rankings are appropriate, some 38.9 per cent are in their sector’s top quartile for the past three years.
Another 16.8 per cent are in the second quartile, with 23.2 per cent in the third and 21.1 per cent in the bottom.
Of these funds, the highest three-year return has come from Mirabaud Equities Global Focus – which is up 62.84 per cent against a gain of 35.95 per cent for its average IA Global peer.
Managed by Anu Narula, the £261.9m fund has a positive screening process that looks for companies at work in various themes and has ESG analysis at its heart.
The sustainable element to the fund is highlighted by its largest holding: US water technology provider Xylem, which develops technology solutions to meet the world's water, wastewater and energy needs.
Source: FE Analytics
The table above shows the 37 ethical funds that are currently in the top quartile of their peer group, ranked by their three-year total return.
That list contains some large strategies, with the biggest being Roger Merz and Thomas Schaffner’s £3.4bn Vontobel mtx Sustainable Emerging Markets Leaders fund.
The process behind the portfolio (which includes Alibaba, Tencent and Taiwan Semiconductor as its largest holdings) uses ESG criteria as a way to find companies with “farsighted strategies, sound financials and robust structures”.
This fund is not particularly well-known in the UK but several others have a strong following.
Bryn Jones’ Rathbone Ethical Bond fund has assets under management of £1.4bn and has generated a 16.99 per cent return over the past three years, making it the second-best performer of the IA Sterling Corporate Bond sector.
Analysts at FundCalibre said: “This fund typifies stable management, with Bryn having been at the helm for over 15 years.
“It has managed to outperform regardless of its ethical considerations, illustrating that income and ethics can be combined without sacrifice. This makes for a very dependable bond fund even for a conscientious investor.”
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
When it comes to UK equities, Mike Fox’s £811.9m Royal London Sustainable Leaders Trust sits in the top quartile of the IA UK All Companies sector after making 41.8 per cent.
This five FE Crown-rated fund has a very strong track record, with top-quartile numbers over one, five and 10 years as well. Fox has had a similar level of success with the ethical multi-asset funds he runs.
The FE Invest team said: “The manager’s investment style brings something different compared to other managers investing in UK equities, as he combines the principles of socially-responsible investment (SRI) with in-depth company financial analysis. This process guides him to companies considered leaders in environmental, social and governance issues with the potential for growth.
“Fox’s track record highlights the benefits of his style. Despite several periods of outperformance from cyclical sectors and natural resources companies, the fund continues to beat its peers over the long term. Fox is very experienced manager who has shown great capacity to add returns through positive stockpicking.”
Within the IA UK All Companies sector, ethical strategies such as Liontrust UK Ethical, BMO Responsible UK Equity and Liontrust Sustainable Future UK Growth have also posted top-quartile returns in recent years.
Meanwhile, BMO Responsible UK Income, Janus Henderson UK Responsible Income and Unicorn UK Ethical Income have achieved this in the IA UK Equity Income peer group.
Large global ethical funds that have just had a strong three years include Janus Henderson Global Sustainable Equity, AB SICAV I Sustainable Global Thematic Portfolio and BMO Responsible Global Equity.