Morningstar, the funds ratings firm has recently added a carbon risk rating, enabling investors to see how the most popular funds rank in terms of how environmentally friendly they are.
Choosing the most environmentally friendly and ethical funds are important parts of investing ethically, a concern that is becoming increasingly important to more and more investors.
Some options include investing in funds that are 'ethical' or 'responsible'. Alternatively more general funds that avoid industries or sectors that the investor has decided to target can be utilised.
Some funds are currently not listed as part of The Morningstar Carbon Risk Score list as the Morningstar must have data on at least 67% of the portfolio, which is not always available.
A special 'low carbon designation' is available for companies that have a low exposure to fossil fuels. If the company also derives less than 7% of their revenues from coal, oil and gas, then a low carbon risk score of less than 10 will be awarded.
Hortense Bioy of Morningstar says:
"Sector exposures play a role in funds’ carbon score. Funds that invest largely in energy and utilities and the industrial sector have the highest carbon risk.
Those investing mostly in technology and healthcare have lower levels of carbon risk."
An example of a popular fund that does not score particularly well is Artemis Global Income, as the fund is weighted towards energy, industrials and materials by approximately 30%.
The Henderson China Opportunities fund is also one fund that has a high carbon risk score.
However, this rating is based on the past performance of a company when compared against the metrics above without taking future initiatives to reduce their exposure to fossil fuels for example.
If you are interested in investing ethically, your financial adviser can assist you in putting a long term investment strategy in to place that will enable you to meet your goals while being kind to the planet.
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.
Past performance is not a reliable indicator of future performance.