How to invest yet also be socially responsible

If you are looking to invest in the stock market but also want to make a positive impact on environmental and social issues, then socially responsible investing may be for you. Sam Dickens, assistant portfolio manager at IG, takes a look at six of the best ETFs that facilitate socially responsible investing.

How to invest yet also be socially responsible

The 2016 Global Sustainable Investment Review estimates that around $12trn worth of European assets are invested in sustainable and responsible investment strategies. While the majority is held by institutional investors, the proportion of the socially responsible (SRI) assets owned by individual investors has surged to 22% of the total amount, up from 3.4% in 2014. This highlights the growing popularity for this type of impact investing amongst retail investors.

You are able to invest in a broad number of sustainable and responsible companies using SRI exchange traded funds (ETFs). These seek to track a basket of companies deemed to be sustainable or having a low negative social impact.

Each SRI ETF tracks an SRI index, created by index providers such as MSCI. This is why it is common to see the name of the index provider included in the name of the ETF. For instance, iShares MSCI Emerging Markets SRI UCITS ETF looks to mimic the returns of the MSCI Emerging Markets SRI Index, less the annual fee charged by the ETF.

There are different ways in which socially responsible indices can be created. The two most common methods are:

  • Exclusionary screening: companies in industries such as gambling and tobacco are simply removed from the index.
  • Focus on ESG factors: companies scoring highly on environmental, social, and governance, or ESG, concerns are given a higher weight in the index. For instance, Company A will receive a relatively higher weight than Company B if Company A’s carbon footprint is lower than Company’s B.

While some people may think that excluding a tranche of companies could compromise performance, in fact the opposite can be true. There is evidence to suggest that by excluding controversial companies, returns can indeed be enhanced.

iShares and UBS are the only ETF providers to offer an extensive range of socially responsible ETFs. But we believe this will change as the demand for this type of product continues to grow. Below we take a look at six ETFs that you may consider investing in to make your portfolio more socially responsible.

Six to consider

iShares Dow Jones Global Sustainability Screened UCITS ETF — IGSG

IGSG provides a solid core to any socially responsible portfolio. It invests in a range of global companies but excludes those involved in industries such as weapons manufacturing and adult entertainment. Its expense ratio of 0.6% is admittedly higher than some of our favourite low-cost global ETFs — see HSBC MSCI World UCITS ETF (HMWO) which charges just 0.15% for comparison. However, it has outperformed HSBC’s offering by an impressive 0.78% so far this year, proving itself as value for money as well as promoting sustainable investing.

UBS MSCI United Kingdom IMI Socially Responsible UCITS ETF — UKSR

If you are looking to invest in sustainable companies a little closer to home you might be interested in UKSR which invests in 162 companies listed on the London Stock Exchange for an expense ratio of just 0.28% per year. Its performance since its inception in October 2014 is also impressive, outperforming the FTSE All Share Index by 4.5%.

UBS MSCI EMU SRI ETF — UB39

UB39 allows investors to buy a basket of socially responsible stocks from across the eurozone. Its average bid/ask spread is tight at 0.28 and it has €338m in assets under management. It is also physically replicated and has an annual fee of 0.28%.

UBS MSCI Japan Socially Responsible UCITS ETF — PSR

Japanese equities have so far had a mixed performance in 2017. Financials have lagged while the technology sector has performed strongly. JPSR is currently positioned to continue to perform well if this trend persists, with a higher exposure to tech stocks (+2.5%) and less to financials (-8.5%) relative to the wider TOPIX index. It has an expense ratio of 0.4%.

iShares MSCI Emerging Markets SRI UCITS ETF — SUES

SUES won Best New Equity ETF in Europe at the 2016 ETF.com Awards and has outperformed its parent fund since its inception and achieved these returns whilst taking on less risk. This is in part due to a reduced exposure to China but also because it is invested in companies which are less likely to experience risks such as worker strikes and factory shutdowns. SUES is also priced very competitively with an expense ratio of just 0.35%.

iShares Global Clean Energy UCITS ETF — INRG
For the contrarian investors out there, INRG may provide value for those looking to invest in a range of global companies which produce energy from solar, wind and other renewable sources. INRG fell 12% after Donald Trump won the US Presidential Election and although it has since returned to its pre-election price, it is still 11% cheaper relative to iShares MSCI World ETF (IWRLD) than it was in November last year. While recent rumours of a ‘Solar Wall’ along the US-Mexican border has helped boost the share price of US solar companies, it remains to be seen whether that actually happens.

Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change. 

 

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