Three top ethical stocks

Each week, a professional investor tells us where she'd put her money. This week:Rachel Winter, Killik & Co.

Investors are increasingly focusing on stocks that satisfy moral as well as financial criteria. Interestingly, there is evidence to suggest that firms that focus on ethical behaviour, sustainability and corporate governance achieve superior long-term performance.

Ethics is a subjective topic, and there are many viewpoints on what constitutes an ethical portfolio. Some investors may avoid companies involved in activities deemed to be unethical, such as weapons development and animal testing. Others may actively include companies seen to be making a positive difference to the world, such as renewable energy and fair trade.

Here I've selected three companies that feature in the United Nations Global Compact 100, an index featuring firms that have implemented the UN Global Compact's Ten Principles covering human rights, labour, the environment and anti-corruption. Firms must also demonstrate financial health to be included. This year the Global Compact 100 has outperformed the S&P 500.

Citigroup (New York: C) chairs the Equator Principles Steering Committee, which dictates that financial institutions must only provide loans to borrowers whose projects will be developed in a responsible manner. It also operates an employee-diversity framework featuring 54 networks.

The current economic environment looks favourable for Citigroup, which operates as both a retail bank and a corporate/investment bank. Retail deposits should become more profitable as US interest rates rise, with the Federal Reserve predicting three further rate rises in 2018. Investment-banking revenues should rise if Donald Trump eases up on banking regulation and lowers corporate tax rates.

Cosmetics giant L'Oral (Paris: OR) has won countless awards for employee welfare, pioneered synthetic skin that can be used in place of animal testing, and lobbied the Chinese government to abolish laws that necessitate animal testing for cosmetics. Financial performance has been impressive too.

It is a diverse business with expertise in haircare, skincare, fragrance and make-up, and is currently benefiting from an increase in demand for make-up caused by social media and the desire to be camera ready at all times. L'Oral continues to grow and to take market share, particularly in online sales. The firm also posted a 33% increase in e-commerce sales last year.

Deutsche Telekom (Frankfurt: DTE) is a telecoms business with a global presence. It is involved in numerous climate-change initiatives and is on track to reduce its own carbon emissions by 20% between 2008 and 2020. Video streaming will also drive an estimated 23% increase in fixed-line internet traffic between 2016 and 2021. Deutsche Telekom has upgraded its network and should be well placed to service the growing demand.