Two funds helping investors navigate animal testing concerns

The future of animal testing moved into the spotlight last week after the European Commission unveiled a roadmap to phase out animal testing in chemical safety assessments. 

While regulatory change and scientific advances are reducing the need for animal testing in some areas, it remains a complex and evolving issue, particularly in medicine. Funds can take very different approaches, and exclusions can materially shape portfolios, which means their performance can differ from the broader market, especially over shorter time periods.

From testing disease treatments to testing cosmetics and household product safety, over 115 million animals are used in experiments every year. 

It can be a brutal experience for the animals, and many are, subsequently, euthanised. This goes someway to account for why HL clients are divided on the issue. In fact, our most recent Sustainable Investor Survey revealed 50% of clients were uncomfortable investing in companies that conducted animal testing, while the remainder were either comfortable or undecided. 

There’s a distinction between animal testing used for medical and non-medical purposes. It’s widely acknowledged that experiments using animals have led to medical breakthroughs such as insulin therapy for diabetics, antibiotics, the polio vaccine and, more recently, vaccines for Covid. And there’s overwhelming scientific consensus some animals are still needed for medical progress to continue.

See also: HL’s Rowles: ‘The ESG backlash is our own fault’

But what about animal testing that’s not protecting lives? 

Animal testing for cosmetics is largely banned in the UK and the EU. In the latter, it’s illegal to market or sell cosmetics where the final formulation or ingredients are newly tested on animals, for cosmetics purposes.

The UK retained similar rules after leaving the EU. Several countries outside Europe have introduced comparable bans or restrictions. There are exceptions, of course. In the US, there’s no nationwide ban on cosmetic animal testing. And in China, despite some regulatory reform, certain cosmetics such as hair dyes and sunscreens are subject to stricter requirements and testing.

Thankfully, there are thousands of products out there with established, safe ingredients, meaning no additional testing is needed. And where new testing is required, the science has moved on significantly.

Today, companies can often use non‑animal methods such as computer modelling, cell‑based studies and reconstructed human tissue. These approaches can enable a more accurate prediction of how ingredients behave in the human body. AI is also being used to analyse data and predict toxicity, while “organ‑on‑a‑chip” tech recreates miniature human organs, using living cells, allowing for observations of how substances interact with human‑like systems, in real time.

So, what are the options for investors?

Funds can also take very different approaches to animal testing and related ethical issues, as well as investment objectives. And investors should also note the exclusions applied by these funds mean their portfolios can look very different to the broader stockmarket, which also means their performance can vary too.

Two funds that the HL fund research team rates highly are Aegon Ethical Equity and Janus Henderson UK Responsible Income. 

Audrey Ryan has managed Aegon Ethical Equity for more than 25 years. She aims to identify and understand the key environmental, social and governance risks of each company, industry and sector she invests in. She believes companies that lead the way in governance and sustainability can outperform over the long run.

The fund uses a strict exclusions-based approach. It won’t invest in companies involved in activities deemed unethical, from tobacco and alcohol producers to arms manufacturers and banks with significant exposure to developing country debt. The fund also avoids companies that provide animal testing services, or that sell animal-tested cosmetics or pharmaceuticals.

The fund applies several additional animal-related exclusions, including companies involved in intensive farming, companies that operate abattoirs and companies that produce or sell meat, poultry, fish, dairy or slaughterhouse by-products.

Andrew Jones has been at the helm of the Janus Henderson UK Responsible Income fund since January 2012 and has over 20 years’ experience managing UK equity income funds. The fund aims to give a good level of income, alongside capital growth over the long term. 

Jones’ investment process starts with a screen which excludes companies with significant involvement in areas some investors consider unethical, such as alcohol, armaments, gambling, and tobacco. He also excludes companies that aren’t compliant with the UN Global Compact (a United Nations pact on human rights, labour, the environment and anti-corruption). 

The fund doesn’t invest in companies that make vitamins, cosmetics, soaps or toiletries, unless it’s clear their products and ingredients are not animal tested. However, it will invest in companies that use animal testing for medical purposes if the company is committed to demonstrating best practice in line with a set of guiding principles called the ‘Three R’s’: Refine experiments to ensure suffering is minimised; Reduce the number of animals to a minimum; Replace animals with alternative techniques where possible. 

As always, investors should understand where a fund draws the line – and ensure it aligns with both their values and their performance expectations.