'Why I'm Switching Over to Green Funds'

Investor Views: Retired investor James McLeish has started to add more environmentally themed funds into his portfolio

Emma Simon 9 June, 2021 | 11:37AM
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Investing in more environmentally-aware funds isn’t just a concern for millennial investors. James McLeish, who retired five years ago after a career in banking, has now started to look more seriously at this sector.

“I have held so-called ‘ethical funds’ in the past. But it seemed these were sometimes quite restrictive in terms of the stocks and shares they could invest in. Some performed well, but I always assumed that returns might be slightly below a similar non-ethical fund.”

However, James says today there seems to be a far broader choice of funds that offer the opportunity to do good, while also making money for investors.

“I see this is a real opportunity. I certainly want to do my bit when it comes to climate change. Funds that are supporting new ‘green’ technologies and are looking at issues like fossil fuels and carbon emissions seem to be in a good position to be investing in the companies of tomorrow.”

James feels that investing in these funds should make more of a difference than simply “doing the recycling” or trying to buy clothes and food from more sustainable manufacturers.

He adds: “We’ve recently had our first grandchild. It certainly makes you think a bit harder about protecting the planet for the next few generations.”

Fund-of Funds and Index Trackers

James and his wife Jean mainly invest via ISAs. He has a company pension, which along with his State Pension which provides his main income. James also has a small Sipp into which he’s consolidated a couple of smaller workplace pensions.

Within his ISA, James more recently invested in AJ Bell Responsible Growth. This is a fund-of-funds that invests invests in a mix of passive and other collective investment funds that follow a more responsible investment strategy. Its top holdings include SRI (socially responsible investment) ETFs from Amundi, UBS and iShares.

Other “green” holdings include the Legal & General Future World Climate index and L&G’s Hydrogen Economy ETF.

L&G’s Future World Climate index has a Gold Rating from Morningstar. This passive fund aims to provide a combination of both growth and income by tracking its benchmark, the FTSE All-World ex CW Climate Balanced Factor Index.

Morningstar analysts point out that this fund is supported by a strong portfolio management team which has a clearly defined investment process. It also maintains a cost advantage over competitors. This has helped it deliver good returns for investors in recent years. According to Morningstar data it has delivered annualised returns of 10.06% over the past three years.

L&G Hydrogen Economy ETF is a relatively new ETF, which has yet to build a track record. James admits this is potentially a more risky holding but he hopes it will deliver over the longer term. This fund aims to provide exposure to companies engaged in the global hydrogen economy which seek to contribute to the reduced use of traditional fossil fuels and help promote cleaner and more sustainable energy sources.

Gradual Switch

While he has more recently invested in “greener” funds, he still has a number of more traditional funds within his portfolio. “I am gradually switching over, taking opportunities where I see them, and perhaps getting rid of some of the funds that were more heavily weighted towards mining or oil stocks.”

He still will have some exposure to these through some of the mainstream index trackers he holds within his portfolio. “It would be quite hard to divest completely at present. You certainly wouldn’t have a very balanced portfolio. I am trying to invest positively where I can.”

Other holdings include Vanguard’s FTSE Global All Cap index, as well as Bronze-rated Liontrust Special Situations and the Threadneedle UK Mid 250 fund.

James says: “When I started investing 20 years ago I mainly held active funds, but I’ve noticed that a far greater proportion is now in index-tracking funds and ETFs.

“I like the fact that the fees are far lower. There is also far more choice now when it comes to passive investments. You don’t simply have to follow one of the main stock market indices, you can track indices that are focused on companies involved in develop AI solutions for example, as well as those that have take carbon emissions or ESG ratings into account.”

While he has tried to invest more sustainably in recent years, he does find the jargon surrounding this area quite confusing.

“I worked in banking for many so am comfortable with most financial terms, but there does seem to be a confusing array of acronyms when it comes to more climate-focused or ethical investments.

“I invest in SRI funds, responsible investment funds, ESG funds and have looked at ‘Impact’ funds and sustainable funds. I am not always quite sure what the difference is between some of these terms. But broadly speaking they all seem to be taking issues such as climate change into account, which is a good thing. But it would be better if it was simplified - I think that would help a lot of people who find dealing with their finances quite daunting.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk