20 pledges for 2020: Should green-minded investors avoid cheap index tracking funds?

I’ve pledged to help people navigate the green investment maze in 2020. There’s no one way through it. But it is a way you can achieve positive change

If you want to track the FTSE 100 you have to put up with a lot of natural resource companies (Getty)

Investing in trackers means you have to take the rough with the smooth, hitching your wagon to oil companies and natural resource outfits if they're in the index you're tracking. The FTSE 100 has a lot of those

Investment funds that aim to follow or “track” the performance of a designated stock market index, as opposed to trying to beat it, are inexpensive, easy to understand and hugely popular, especially amongst novice investors.

With good reason. Most of the time they outperform so called actively managed funds run by stock pickers which too rarely beat the markets they're benchmarked against after their higher costs are factored in.

But trackers pose a problem for people who are concerned enough about the climate crisis to want to green up their investments.

A tracker investor is inevitably exposed to most, or all, of the constituents of the index their chosen fund tracks. So they have to take the rough with the smooth. Sometimes the rough is very rough indeed from the perspective of planet earth.

Britain’s premier stock market index is, for example, chock full of natural resource companies. They are some of FTSE 100's biggest and most important constituents.

You have oil giants (BP, Shell), you have mining companies (Anglo American, BHP Group, Rio Tinto).

A person who saves via a FTSE 100 or FTSE All Share tracker is hitching their wagon to the performance of all of these companies. So if, say, BP does well, they do well.

Talk about carrying the mark of Cain.

Does this mean their only option is to scour the ranks of actively managed funds with ESG (environmental, social and governance) screening? Do they have to leave the cheapest, and best, route into the market for most novice and smaller investors on the shelf?

Not necessarily.

One way of solving this apparent dilemma is through choosing a tracker manager prepared to vote in favour of things like climate resolutions when they’re put forward.

Regular readers of this column will recall that I looked at the voting behaviour of big asset managers in the last edition. I highlighted two separate studies that found European money managers do a lot better than their US peers when it comes to voting in favour of progressive resolutions.

My own trackers are with Legal & General, which scored highly in both, and has a policy of calling out the worst climate offenders.

Companies on its naughty list are excluded from its ESG screened Future World range of funds. The money manager has also committed to voting against their boards with the shareholdings of its other funds.

I still think L&G could be more assertive than it is. Said naughty list does not, for example, include either BP or Shell which are held to have done better than the companies on it, including (for example) ExxonMobil and Rosneft,

But its stance is more progressive than many of its peers, which is why I have a chunk of my savings there.

For those who want to do more than simply relying on a fund manager to use its voting power to call out poor corporate behaviour, its Future World range offers what you might describe as ethical trackers, that incorporate ESG screening.

The “ethical trust” for example, is managed “passively” in that it tracks the FTSE 350 index, made up of the FTSE 100 and the second tier FTSE 250. But there are no stock pickers involved, it excludes from its portfolio the shares of companies “whose business does not meet a range of ethical and environmental guidelines”.

As such, oil and gas companies comprise 0.5 per cent of its holdings.

You might describe it as a passively managed fund for people with an active social conscience.