A greater understanding of ethical, social & governance (ESG) issues is leading to more sophisticated investor behavior and demand for more advanced strategies, according to Whitechurch Securities senior investment manager Amanda Jane Tovey.
While ethical concerns used to revolve around negative screening on sectors such as tobacco, alcohol and armament companies, Tovey said the number of investors asking questions about companies’ positive social and environmental impact is on the rise.
“The industry has changed a lot in the last 10 years, there’s been a big shift,” Tovey said. “Not only that, but new funds, whether they are ESG or socially responsible, have picked up in the last year.
“We have seen a huge increase in demand, not just from clients but from fund managers as well.”
Tovey, who is head of socially responsible investing & direct equities at Whitechurch, said historically the interest in the strategies came from charity investors and those who to screen-out alcohol, tobacco or armaments stocks.
However, she said there is now a growing interest in knowing the positive contributions to society that companies are making.
“Arms production and export, production and sale of tobacco, weapons systems and irresponsible promotion of alcohol consumption are still concerns but investors want to know if businesses are reducing their carbon emissions, providing better healthcare or solutions for global food shortages,” she said.
“People look down the supply chain as far as they can. They also want to know how the company operates within the area it is based in. Some of the questions investors ask are: how do they treat their suppliers? Do they have community programmes? How are their employees looked after?”
ESG funds under management and as a proportion of total
Source: The Investment Association
According to data from The Investment Association, ethical funds under management stood at £15.4bn at the end of December 2017 up from £12.4bn in 2016. Durng the first quarter of 2018 ethical funds saw net retail sales of £284m, compared with £129m for the prior-year period.
Not only has ESG investing behavior evolved, noted Tovey, the sector has also increased its popularity among older generations with performance disparity reducing over the past five years. 
She said: “We get feedback from younger generations and millennials and, certainly, a lot of our demographic is now older clients. We have seen a lot of interest there as well.
“ESG is also less of a performance issue than it was. Performance disparity has reduced over the past five years.”
Tovey added: “Of course, if oil, miners and tobacco have a rally then you will obviously have the UK fund that will underperform at some point.
“But when I sit with the clients, some will be willing to see some underperformance. Although it depends on different clients. Of course, if it’s your pension fund and its all you’ve got to live on then that is a choice you’ve got to make.”
Tovey said the wealth manager decided to launch their ethical portfolios two years ago, with many of the funds they hold including positive screens in addition to negative ones: rewarding companies for positive actions in the areas of renewable energy, reducing environmental impact and positive social contributions.
Whitechurch’s Ethical Balanced portfolio has an 18.3 per cent allocation to UK equities, a 17.6 per cent held in global fixed interest, a further 17 per cent in UK fixed interest, 11.7 per cent North American equities and an 11.6 per cent allocation to European equities, including the four FE Crown-rated Rathbone Ethical Bond and the five FE Crown-rated Pictect Water.
The £4.4bn Pictet Water invests two-thirds of its total assets in the shares of companies operating in the water sector worldwide and is included in the FE Invest Approved list.
The fund applies a negative screen whereby companies that risk contributing to violations of humanitarian principles or violations of human rights, gross corruption or severe environmental damage are all excluded, with the list of blacklisted companies regularly reviewed and updated.
Over five years, Pictet Water has delivered a 68.74 per cent total return compared with a gain of 63.04 per cent for the average fund in the IA Global sector and a 76.80 per cent gain for the MSCI World index. The fund has performed in line with the index since 2010, only underperforming in 2013 and 2014.
Pictet Water is team managed by Hans Peter Portnet, Arnaud Bisschop, Philippe Rohner and Simon Gottelier. It has an ongoing charges figure (OCF) of 1.20 per cent.
Performance of funds over 5yrs
Source: FE Analytics
Also included in the FE Invest Approved List is the £1.1bn Rathbone Ethical Bond, overseen by Bryn Jones and Noelle Cazallis.
The FE Invest analysts noted: “Jones strongly believes that he can improve society through selective debt financing and, over its history, the fund has invested in many educational and social housing programmes.
“The impact of the ethical screening on bond selection has been positive on the fund’s performance.”
It has delivered a 31.30 per cent total return compared with a 19.81 per cent gain for the average fund in the IA Sterling Corporate Bond sector over five years. The bond fund has a yield of 3.80 per cent and an OCF of 0.68 per cent.
Other holdings in the ethical balanced portfolio include: F&C Responsible UK Income, F&C UK Property, Janus Henderson Global Sustainable Equity, Kames Ethical Corporate Bond, Liontrust Sustainable Future Corporate Bond, Liontrust Sustainable Future Global Growth, Premier Ethical and Standard Life European Ethical Equity.