Ethical Investing in the UK: Oversight, Fund Rules and Returns
Oversight and Regulation
The FCA released a policy statement in 2023 regarding sustainability claims in financial products. It’s long-winded but it can be boiled down to: financial products making sustainable claims need to ‘do as they claim and have the evidence to back them up’.
They also aimed to standardise the terms of engagement with a set of four labels which investors could rely upon when making decisions: Sustainability Impact, Sustainability Focus, Sustainability Improvers and Sustainability Mixed Goals.
There’s some evidence that perhaps they have been a little too heavy-handed as not a single UK-based passive fund managed to fulfil the requirements for one of the labels - all the funds that did were actively managed.
That matters because if you remember the blog on stocks and shares, a lot of investors choose index fund type products which are passively managed. The manager picks stocks based on matching a particular market rather than any specific knowledge or expertise (i.e. if a company is worth 10% of this index, then the fund will invest 10% of its money in that company). Passively managed funds, therefore, are generally cheaper and easier to access for a wider variety of people - is it really the case that they shouldn’t be able to access sustainable financial products which have been verified?
Investment Returns in Ethical Investment
If it seems to you that companies who score highly on the ESG metrics might just be better companies and more likely to do well in the future… well… I personally would have to agree.
But I would say there is mixed data on whether these products outperform traditional ones in the long-run - I think it’s fair to say they don’t particularly underperform either. This article suggest that they may financially underperform over the longer term when you adjust for risk, but this article suggests they outperformed traditional funds in the first half of 2025.
So the jury is out in terms of performance. I think it’s worth remembering two things: past performance is no indicator of future performance and, if we take it all the way back to the first blog in this series, the balance here is personal to you. You may value ethical or impact investment over financial return for a million different reasons - including allowing you to access investment and financial security in a way that allows you to sleep at night. Fair play.
Why Do Customers Choose ESG Products?
On that note, I enjoyed this article from Santander about why retail investors choose ESG funds and the answer seems to be a mix of morals and also a chance to show off a bit, but they’re less concerned with strict financial performance. It includes a staggering statistic that by 2020 retail investors (as opposed to institutional investors like pension funds) had reached 25% of the total global ESG market - up from 11% in 2012. That’s quite a leap!
This article points out that ESG funds may show lower variance in returns - so they could offer a steadier path than traditional options which may appeal to a person with lower risk tolerance.
There is also research to suggest that ESG funds may show more resilience in times of market turmoil - possibly because the companies focused on sustainability have by their nature, solid economic handling baked in (look at the United Nations Sustainable Development Goals 8, 9, 11, 16 and 17).
Until 2021 ESG funds were, on average, more expensive than their traditional counterparts, according to Morningstar, but as of July 2024 that’s no longer the case as ESG funds are now cheaper. The costs have also reduced quicker than traditional funds probably because of the huge influx of new products on offer (this analysis also explores the backlash against ESG investing and how political events like Trump’s re-election might cool the market with ‘anti-woke legislation’ which I thought was interesting).
The End - Or The Beginning?
So, apart from tomorrow’s frequently asked questions newsletter, this marks the end of this little series on ethical investment. It won’t be the last you hear of it from me, obviously (!!!) but my aim was to give an overview that we could refer back to. It’s been quite a lot of work - especially reading - and there’s probably as much that I cut out as I left in.
It’s a huge area, I’m sure it will only get huger, but I am super proud and excited that it’s been something that this audience has been so engaged in right from the beginning. What an exciting (and terrifying) time to be alive!
Please don’t stop asking questions!
Love Eleanor. xxx
