Assets held in ethical funds have trebled over the last 10 years, and now total £16.7bn.
However despite this growth, these funds account for just 1.3 per cent of all retail investment funds.
The research – published by Hargreaves Lansdown ahead of Good Money Week – shows that investors who adhere to a stricter line on environmental, social and governance factors have not had to compromise on performance.
Figures from the Investment Association show over the past decade, ethical funds delivered a total average return of 125.2 per cent. This compares to a return of 115.8 per cent from the FTSE All Share index, and a 115.6 per cent from the FSTE 4 Good UK Index – an index designed to track companies with better ESG ratings.
However Hargreaves Lansdown points out that non-ethical funds currently in the sector have on average produced a higher return, at 134 per cent.
Hargreaves Lansdown’s senior analyst Laith Khalaf says that this figure those is skewed upwards by a number of mid and small cap funds within the IA UK All Companies sector which have posted exceptionally high returns over this period.
This research will be of interest to many occupational pension trustees, who thanks to new DWP regulation will have to take into account ESG and stewardship factors as part of their investment process.
Khalaf adds: “Ethical investing is still a small part of the fund landscape, but there are signs it’s gaining traction with UK investors.
“Ethical fund sales are ticking up, albeit from a relatively low base, and more traditional funds are becoming more socially responsible. That’s partly because a poor ESG record is now widely seen as a red flag for investors from a risk perspective, as well as an ethical one.”
He points out that while sales of ethical funds have grown over the last 10 years, there has been an increase in the amount of money flowing into non-ethical funds too, with 2017 being a record-breaking year for fund sales across the board.
He adds: “As a percentage of total industry funds under management, ethical funds actually fell between 2008 and 2015, but have recently enjoyed a rebound and now stand at their highest ever proportion of total assets under management.”