ii rebrands its long list from ‘ethical’ to ‘sustainable’

interactive investor shines a light on the performance of the sustainable investing universe.

interactive investor, the UK’s second-largest investment platform for private investors, is changing some of its language around environmental, social and governance investing (ESG) as private investor awareness and interest in ESG has grown.

Replacing ‘ethical’ with ‘sustainable’, the most noticeable changes will be seen through some of ii’s flagship research tools. The interactive investor ethical investing long list is now the ‘Sustainable Investing Long List’, and ACE 40’s new strapline is ’Sustainable rated list’. Similarly, ii’s ‘Ethical Growth Portfolio’ is now the ‘Sustainable Growth Portfolio.’

The platforms sustainable ‘ACE’ styles (standing for Avoids, Considers and Embraces), coined to help investors navigate the sustainable investment universe, will remain.

Dzmitry Lipski, Head of Funds Research, interactive investor, said: “What a difference a few short years makes. Our long list started in September 2019 with roughly 140 funds, investment trusts and ETFs, and now exceeds over 200, with total assets under administration of over £1 billion. As awareness of the sector has grown, some of the industry-accepted terms have started to settle and ‘sustainable’ feels more inclusive than it used to.

“Times have moved on, but our tools are as important as ever in helping investors navigate the sector with greater confidence. Now as then, our long list is not a rated list – that’s what ACE 40 is there for. Instead, it’s a rigorously researched long list of sustainable options available to investors. We work with SRI Services, who help us assess whether funds are doing what they say on the tin, giving greater comfort that ‘sustainable’ claims can be backed up.

“We are continuously making sure that our research, content, and material reflects the needs and wants of retail investors across the UK.”

Commenting on the update, Julia Dreblow, Director, SRI Services, says: "We are supportive of this change from ii. The term ‘ethical’ – although appropriate at the time of the Sustainable Long Lists’ inception - and still important to many – now resonates less well given the increased focus on sustainability, and in particular challenges such as climate change. These lists, and the classifications that accompany them are intended to help people understand what different funds do and help guard against possible ‘greenwashing’. My view is that this is a step in the right direction. We all need to put far greater emphasis on ‘sustainability’ so ii putting it centre stage is most welcome."

How the so-called ‘great rotation’ into value has impacted the performance of sustainable funds

While awareness of sustainable investing has grown, it has come at a time when, over the year to date at least, performance has faltered.

This year, we have seen a decisive shift from growth companies into more traditional value stocks. Therefore, the current bout of rotation has boosted the share prices of sectors where rising interest rates and inflation can be of benefit to the business model, such as banks and energy stocks, and therefore not your traditional ESG companies.

Of course, those looking to invest sustainably will be looking beyond ‘traditional’ energy stocks and interactive investor customers are increasingly looking at alternative energy.

Ethical performance year to date

Looking at performance of the interactive investor Sustainable Investing Long List is a good proxy for the performance of the sustainable sector at large. Sustainable funds have had a tough start to the year. In a tough year to date for markets, just 10.6% of ii’s Sustainable investing Long List delivered positive returns, and 21.2% outperformed their respective benchmarks. Some 38.4% of the investments were ranked 1st and 2nd quartile performance among their Morningstar peers.

Over one year, just under half - 45.4% - of the investments on ii’s Sustainable Long List delivered positive returns, and 29.6% outperformed their relevant benchmarks. In addition, 41.3% ranked 1st an 2nd quartile among their peers. 

Longer-term

Over three-year and five-year periods, 94% and 97% of the investments on the ii Sustainable Long List delivered positive returns respectively.

62.5% of the investments on the list performed better than their peers* over a three-year period and ranked 1st and 2nd quartile. This figure rose to 68.4% over a 5-year period.

In addition, over the long-term, ESG indices (Europe and World) outperformed equivalent mainstream indices.

Dzmitry Lipski explains: “Investors need not view sustainable investment choices and better returns as a zero-sum game. There is a growing body of evidence that suggests that companies with good ESG practices should be expected to outperform their less ethical counterparts. And while value stocks appear attractive today, it is likely that environmental, social, and governance factors will continue to drive growth going forward and the reality is that investors should be looking to combine different styles, and that means mixing growth with value.”

ESG market performance – ESG indices versus their equivalent mainstream indices

Source: Morningstar Direct as at 31 May 2022. Total Returns in GBP. Past performance is no guide to the future.