Three Responsible Investment ISA ideas for your portfolio

Socially responsible investing is increasingly popular. More people want their investments to make a positive contribution towards issues such as climate change, pollution and human rights. It’s not just about ‘doing the right thing’, though. There’s a convincing investment case. Dubious practices are often ultimately punished by regulators or consumers, while companies providing solutions to sustainability challenges can be capable of strong growth.

What is Responsible Investment?

Responsible Investment considers social and environmental good as well as financial return. It is often used as an umbrella term that encompasses various approaches, one of which involves incorporating Environmental, Social and Governance (ESG) analysis in an investment process.

It encourages corporate behaviour that promotes environmental stewardship, consumer protection and human rights, and typically means considering (and engaging with companies on) key issues such as climate change, labour management, corporate governance, gender diversity and data security, among others.

It also usually means avoiding businesses involved in areas deemed harmful or unethical such as alcohol, tobacco, gambling, weapons or animal testing. Meanwhile, issues such as energy efficiency, water scarcity, safety, and diversity could be specifically targeted as investment themes.

How can you become a responsible investor?

Responsible Investing funds: our selection approach

Our selection process for responsible funds seeks to identify managers with rigorous processes and stock-picking talent – the same criteria we use for assessing any fund. In addition, we seek to identify those genuinely making a positive social and environmental impact while avoiding any areas considered unethical or controversial.

To cover every investor’s ethical ‘wish list’ is impossible. Issues are personal, so each fund should be carefully considered to see if it fits individual principles as well as investment objectives. However, here are three options we believe are worth considering for a Responsible ISA within their respective areas.

All three are part of the Preferred List, our curated list of investments for new investment in their respective sectors. They are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus.

Three responsible investments to consider

1. Global equities

Baillie Gifford Positive Change shares a number of characteristics with other Baillie Gifford global funds: A high-conviction, concentrated portfolio (of around 30 holdings), which increases risk as well as return potential, a search for exceptional growth businesses, and a low turnover of holdings resulting from investments being kept for the long term and not actively ‘traded’.

The difference is this fund specifically aims to contribute toward a more sustainable and inclusive world while by investing in four ‘impact themes’: Social inclusion and education, environment and resource needs, healthcare and quality of life and ‘base of the pyramid’ (companies addressing the basic needs of the global poorest). The managers aim to generate and measure the positive impact of investments as well as make money, and there is an active approach to engagement and voting.

The fund will have a distinct bias to more expensive growth-orientated stocks. The managers pay little attention to short term valuation fluctuations and aren’t overly concerned with short term reporting numbers. Instead, they try to take at least a five to ten-year view believing that investor short-sightedness is a persistent structural issue in the stock market. The focus is on companies addressing societal challenges. The managers believe that companies making a positive change to society will eventually be rewarded with strong long-term share price performance.

This is an adventurous fund aiming for strong long-term growth, which can mean considerable downs as well as ups, and likely to be of more interest to those willing to accept a high level of risk and commit for the longer term – ten years plus.

2. UK equities

Liontrust Sustainable Future UK Growth invests in 40 to 60 companies that meet the managers’ rules for environmental and social responsibility. The portfolio is constructed from high-quality and sustainable companies benefitting from long-term structural trends. The management team is highly regarded as having established a track record at Aviva and Alliance Trust prior to joining Liontrust.

The investment themes used by the fund encompass safety, resilience, health, quality of life and efficiency, with each stock analysed for ESG factors alongside as return potential. There is a case-by-case approach to engagement with companies on ESG issues. The factors vary according to industry, and there are currently eight proactive initiatives including the sustainable use of plastics, corporate tax responsibility and clothing supply chains. The fund also actively mitigates its carbon footprint.

With a bias to quality ‘growth’ companies, the fund could be reliant on relatively stable economic conditions for outperformance. A sudden economic or political shock could impact its growth-orientated investments to a greater degree than the wider market, and returns could deviate quite significantly from the index or a tracker fund. For longer-term investors, though, we believe the fund offers a strong option for exposure to UK shares.

3. Bonds

Lending to a business is generally less risky than being part owner through shares, so bonds can play an important role in a portfolio. They can help temper the ups and downs of shares, as well as providing a decent, regular income for those who require it.

One established fund option in this area is Rathbone Ethical Bond Fund, managed since 2004 by Bryn Jones. He aims to build a portfolio of good quality investment-grade bonds (avoiding the riskiest ‘high yield’ bonds) while applying a broad range of both positive and negative ESG screening criteria that could appeal to those with ethical concerns.

Thematic research is conducted through topics such as climate change, clean energy, human rights, community investment and employee welfare. The bulk of the portfolio is invested in the bonds of multinational companies and institutions that pass the screens, and there are also a number of charity and green bonds in areas such as social housing, sustainable transport and renewable power.

As certain sectors are excluded on ethical grounds, such as oil & gas, and tobacco, the fund tends to have heavier exposure in financials through insurers and banks. At times this could add to the risk, but we think this is a strong option for UK bond exposure for investors looking for a decent yield.

For more guidance and examples around this topic, check out our free guide to Responsible Investing.

Please note: This article was released prior to SDR and thus the information may not be in line with the Anti-Greenwashing rule but contextually is appropriate for the time it was written.