There are certainly many companies offering solutions to the world’s environmental and social problems domiciled outside of the UK and the UK All Companies sector may not initially appear to be a fertile ground for responsible investment (RI) solutions, given the composition of the UK equity market. UK equities are concentrated in industries such as oil and gas, basic materials, and tobacco, areas often rejected by traditional exclusion-based RI strategies. While such exclusions can effectively steer portfolios away from controversial sectors, they also limit the investable universe, often pushing managers toward smaller-cap stocks.
However, that doesn’t mean fund managers in the UK sector neglect environmental, social, and governance (ESG) factors in their decision-making nor cannot offer solutions to environmental or social problems. On the contrary, their proximity to UK-based companies often allows for more effective engagement with management teams—something that has been integral to many investment approaches for years. Indeed, many argue that governance, a cornerstone of ESG analysis, has been a focus of UK fund managers long before ESG became a mainstream consideration.
Yet, exclusion alone may not be the most impactful approach. Driving meaningful change requires investors to engage actively with companies, holding them accountable for their environmental and social practices. Simply avoiding controversial businesses can limit the opportunity to influence their future direction. For example, should investors avoid a company like Shell due to its historical role as a major greenhouse gas producer, or should they engage with it to encourage a leadership role in transitioning to renewable energy? We have seen UK fund groups make meaningful changes to British companies’ operations from areas as varied as reducing river pollution, limiting modern slavery in supply chains or improving diversity in company boards.
With engagement taking centre stage and regulatory support driving momentum for sustainability more broadly, the UK holds promise for investors seeking to balance financial returns with positive societal impact. It’s a dynamic space – one that’s ripe for thoughtful, forward-looking strategies in the UK All Companies sector.
Funds
Aegon Ethical Equity fund
| Ethical exclusion | Sustainable solutions | Responsible practices | Impact investor |
| ✓ |
The ‘dark green’ approach adopted by Audrey Ryan, lead manager of the Square Mile Responsible A-rated Aegon Ethical Equity fund, sets it apart from many of its ethical peers, which may adhere to more subjective, looser frameworks. Its experienced and competent investment team applies very strict ethical requirements which typically exclude firms within the oil & gas, pharmaceutical & biotechnology, aerospace & defence, food & drug retail and tobacco sectors. This clearly impacts the strategy’s investible universe and its performance. For example, its lack of exposure to energy, utilities and consumer staples was a key determinant for relative underperformance in 2022.
As a consequence of this ethical screening, the fund is likely to have a structural bias to medium and smaller-sized companies, as many of the UK’s larger-sized firms are ruled out. This can also result in a natural tilt to growing firms, as smaller businesses are likely to have higher growth rates than their larger peers. The fund typically comprises between 60 and 80 stocks and there are no formal stock or sector constraints, with investment ideas generated from a range of sources including company meetings, team insight, quantitative screens and a monthly global and UK strategy meeting which provides a top-down perspective on the UK market. Once a potential idea is identified the investment process focuses on three key areas: fundamentals, valuation and technicals.
In terms of fundamentals, a company is examined from both a top-down and bottom-up perspective, where macroeconomic and sector influences are reviewed alongside the company’s management and financial statements. When valuing a firm, the team uses broadly standard financial metrics to discover what is already priced into the market. Finally, technical analysis is used to review earnings and price momentum as well as director dealing, which helps to time investment decisions. The resulting portfolio is a compelling proposition for investors seeking to grow their capital from exposure to UK equities whilst shunning those elements of the market which may be harmful to the society or environment.
Ninety One UK Sustainable Equity
| Ethical exclusion | Sustainable solutions | Responsible practices | Impact investor |
| ✓ | ✓ | ✓ |
Another responsibly focused UK All Companies fund that promises to grow investor capital is the Responsible A-rated Ninety One UK Sustainable Equity fund. Launched in 2018, this fund is the brainchild of its lead manager, Matt Evans who wanted to create a strategy that directly contributes to a more sustainable future through investment in UK companies, as well as delivering outperformance of its benchmark over the long term. He has successfully achieved this goal, having established a credible and durable investment philosophy and process. This is based on what he believes to be the three pillars of sustainability – internal, external and financial – and he has a genuine commitment to using investment as a force for positive change at its core.
The investment process, meanwhile, is based on the sustainable themes framework which was developed in conjunction with the Ninety One ESG team and ensures a consistent approach when it comes to identifying, analysing, monitoring and reporting on companies and their impact on society and/or the environment. These ten themes fall into two categories: society and the environment.
We also appreciate the manager’s dedication to transparency with his investors, especially when it comes to evidencing and reporting the fund’s actual impacts, both positive and negative. Indeed, although all companies in the fund have to be aligned to one or more of the ten sustainable investment themes, Evans is clear that each of them is at a differing stage of its sustainability journey. Therefore, not all of them will be making a significant contribution to these themes from the revenues generated by their products and/or services at any one time, and instead, there will be a range of impacts achieved. In addition, as with the Aegon Ethical Equity fund, due to the negative screen and sustainable investment themes applied, this strategy is likely to be absent from certain sectors of the market and so its performance can and should be expected to deviate from the index.
Royal London Sustainable Leaders Trust
| Ethical exclusion | Sustainable solutions | Responsible practices | Impact investor |
| ✓ | ✓ | ✓ |
The Square Mile Responsible AA-rated Royal London Sustainable Leaders trust is a very solid capital accumulation strategy managed by Mike Fox, a highly experienced and passionate manager within a well-resourced team. He seeks to achieve the fund’s performance aspirations of generating strong risk-adjusted returns by investing in a portfolio of high-quality companies that contribute to a more sustainable future. The long-term approach underlying the fund is disciplined and risk-averse, with the manager looking to benefit from market inefficiencies and thus informational advantages arising from superior sustainability attributes. Its strict sustainability framework imposes certain avoidance criteria meaning the fund is likely to be absent from some sectors and areas of the market, such as tobacco, energy and other capital-heavy industries. This means it has the propensity to lag the market particularly when more cyclically sensitive stocks are leading the way.
However, unlike many older ‘ethical’ funds, the investment process places more emphasis on positive screening than negative exclusions, although there are several hurdles for a business to get over before positive characteristics are assessed. Portfolio holdings generally will demonstrate a positive benefit on society and/or the environment in some way and leadership in their field. These leaders tend to be larger businesses that are less likely to feature in the portfolio of more traditional ‘dark green’ funds. However, the manager believes that larger companies have a greater potential to influence change.
Fox and his team understand that investing sustainably is subjective and it will mean different things to each investor, and therefore, they keep their approach fluid and adaptable, and the fund’s historic success has partly been down to this adaptability. While the fund and approach might be considered ‘lighter green’ than many others in the market, we would stress that there remains a high hurdle rate for investment. Should a business experience problems with its ESG credentials, this would be assessed in a similar way to the financial concerns of a company. In summary, the fund’s consistency of returns, coupled with its focus on protecting capital during more troubled times, should compound into a rewarding investment for investors over the long term.
