The growing popularity of ethical investing in recent years has seen an increase in the number of funds on the market and allowed retail investors to become more selective, according to AJ Bell analyst Laith Khalaf. 
Such strategies have performed strongly this year as the stocks with a greater ESG (environmental, social & governance) focus have rallied harder than mainstream peers during the Covid-19 pandemic.
There have been strong inflows into responsible investment funds this year - reaching £4bn by end-August (compared with £3.2bn for full-year 2019), with four months of flows data remaining.
Khalaf said: “Unless there are heavy withdrawals from the sector in the next few months, ethical funds are on course to have a record-breaking year in terms of retail fund sales. And that’s after a bumper 2019.
“Still less than 3 per cent of all Investment Association retail assets sit in ethical funds however, which leaves plenty of scope for further growth.”
He added: “As more ethical funds launch on the market and reach the critical three-year performance record, which is often used as a bare minimum by professional and retail investors, we can expect flows into these funds to continue to blossom.”
And increasingly ethical strategies are outperforming their mainstream peers, Khalaf (pictured) noted.
As such, Khalaf has highlighted three ethical funds that he believes investors might want to consider.
Liontrust Sustainable Future Global Growth
First up is the £975m Liontrust Sustainable Future Global Growth fund, overseen by Peter Michaelis – head of Liontrust's sustainable funds team. He has managed the fund since 2001, alongside Simon Clements since 2010 and Chris Foster, who was named co-manager earlier this year.
Khalaf said: “This fund invests across the global stock market in companies that are driving sustainable growth. It doesn’t use negative screening – it selects companies on their positive societal benefit, based on around 20 sustainable growth themes identified by the Liontrust team.”
The five FE fundinfo Crown-rated fund aims to deliver capital growth over five years using the proprietary Sustainable Future process to identify key structural growth trends.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Over five years, Liontrust Sustainable Future Global Growth has made a total return of 130.98 per cent compared with a return of 81.78 per cent for the MSCI World benchmark and 75.36 per cent gain for the average IA Global peer. It has an ongoing charges figure (OCF) of 0.89 per cent.
Royal London Sustainable Leaders Trust
The next fund highlighted by Khalaf is the £2.3bn Royal London Sustainable Leaders Trust, managed by FE fundinfo Alpha Manager Mike Fox.
The fund invests at least 80 per cent of the 40-70 strong portfolio in companies listed on the London Stock Exchange that are deemed to make a positive contribution to society and adhering to Fox’s ethical and sustainable investment policy.
Analysts at FE Investments said the manager’s investment style “brings something different to UK equity funds” by combining socially responsible investing principles with in-depth company financial analysis.
Unlike other peers that focus on negative screening, the analysts said, Fox and his team screen all ethical companies to identify those actively engaging in sustainable areas as well as those in “socially neutral areas” using responsible methods of production.
“As such it is a very good candidate for investors who specifically want exposure to companies that are making a positive impact for society or operating in a sustainable manner,” they said.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The five Crown-rated fund aims to outperform the FTSE All-Share index over a rolling five-year period, after charges. Royal London Sustainable Leaders Trust is up by 60.16 per cent over five years compared with a 13.30 per cent gain for the average IA UK All Companies peer. It has an OCF of 0.76 per cent.
Stewart Investors Worldwide Sustainability
Finally, Khalaf highlighted the £564.2m Stewart Investors Worldwide Sustainability fund, overseen by Nick Edgerton and FE fundinfo Alpha Manager David Gait.
“The fund invests across the globe in companies that are positioned to benefit from the sustainable development of the countries in which they operate,” said the AJ Bell analyst. “Edgerton assesses companies based on their social utility and environmental impact, as well as the quality of the management and financial performance.”
Performance of fund vs sector over 5yrs
Source: FE Analytics
Over five years the Stewart Investors Worldwide Sustainability has made a total return of 94.2 per cent. The fund has an OCF of 0.91 per cent.