Ethical investing

Many of us hold investments – whether we realise it or not. Our pensions are a form of ethical investment, as are any investment funds or ISAs that we own.

The money we provide through our investments may be going to anything from coal-burning power stations to new wind farms. So making sure you choose an ethical option can be an important way to have a positive impact on the world.

What is ethical investing?

Investing involves providing funding to an organisation, business or project in the hope that you will get a small payment back each year or month.

Ethical investing involves choosing what to fund based on its environmental, social or other ethical criteria. There are two main approaches to this: either you can avoid the worst offenders (for example companies involved in arms or fossil fuels), or you can focus on funding more ethical alternatives (for example renewable energy projects, or community social housing).

This might sound complicated, but luckily there are lots of investment platforms and providers that will do it for you. These can include banks offering ethical ISAs and investment accounts, ethical pension providers, and specialist ethical investment platforms. The robustness of their ethical practices varies greatly, however, so it’s worth spending some time looking for options you can trust.

Ethical investing involves an element of risk. A good rule of thumb is that you should never invest more than you can afford to lose. However, pensions, stocks and shares ISAs and cash ISAs are guaranteed by the UK Financial Services Compensations Scheme, which may be able to compensate you if your bank or provider goes bust.

Is ethical investing important?

Our decisions about what to invest in helps determine the future. Projects and companies rely on investments to develop and grow. This means that your money could be building a wind or solar farm, but could also be funding a coal mine or oil field. Projects like these last 20 or 30 years into the future – so the decisions we make now will have lasting impacts.

Investing ethically is a chance to align your money and your values, as well as contributing to the ethical transition.

Types of ethical investments

There are lots of ways to invest ethically. Pensions, ISAs (Individual Savings Accounts), investment funds and direct ethical investments all provide ‘wrappers’ for ethical investing: different approaches to funding more ethical projects or organisations. We talk more about each one of these options below.

As consumers, we can either invest directly (for example by buying stocks and shares in a company or project) or, more often, via funds. A fund is essentially a pool of direct investments owned by multiple people, so you may essentially own tiny proportions of Nestle, Amazon and Shell. Your pension is a good example of this.

What ethical investments can I make?

Below we outline ethical pensions, investment funds, direct ethical investments and ISAs.

What is an ethical pension?

For many of us, a pension plan will be the largest investment we hold.

By choosing an ethical pension, you can not only ensure your money isn’t invested in dirty industries like fossil fuels, but that it's going towards financing better industries like more sustainable farming or solar panels.

What is an ethical investment fund?

An investment fund is a pool of money used to invest in companies or assets with the aim of making financial returns, usually in the long run.

Putting your money in a pooled investment fund allows you to invest across a large number of companies. This spreads risk more effectively but does not mean that investment funds are risk-free. As nearly every investment site will tell you: investing carries risk and you could lose your money.

An investment trust works in a very similar way to an investment fund, but is set up as a publicly listed company. Investing your cash in an investment trust means buying shares in the trust as you would any other company on the public stock exchange.

Some companies will offer funds or trusts that have special ethical criteria, such as no funding of fossil fuels.

What is direct ethical investment?

Another option for investing your money ethically is through direct investment platforms. Unlike a fund, you will decide exactly what you’d like to invest in. This means you can choose it in line with your own personal ethics.

Platforms like Ethex and Abundance Investment offer investment options and facilitate the investment process. Ethex has, for example, enabled investments in an organisation putting solar panels on schools and in Libraries of Things.

What is an ethical ISA?

ISAs are ‘individual savings accounts’. Every year, the UK government allows each of us to put up to £20,000 into an ISA without paying income tax on the interest or dividends you may get from it.

There are three key types of ISAs: Cash ISAs, Stocks and Shares ISA and Innovative Financial ISAs. You can find ethical options for all three types.

What ethical investment options are there?

Recently, more and more companies have begun offering specific ‘ethical’ funds, for example ‘Fossil Free Investment Funds’. Unfortunately, though, some of these are more trustworthy than others. Companies may leave significant loopholes in the policies behind these funds, or simply not follow through on their own criteria.

Research by Ethical Consumer recently found that almost twenty percent of ‘sustainable’ investment funds were invested in the world's largest coal, oil and gas companies, or those providing essential service and infrastructure for them. (See video below.)

There are nonetheless some truly ethical providers on the market. Ethical Consumer has rated and ranked 20 ethical investment funds, 15 fossil free investment funds, and 13 pension providers, as well as 46 cash ISA options. Our guides give our Best Buy and Recommended companies in each section.

For each market, Ethical Consumer examines the companies’ policies and track record on issues like tax avoidance and directors’ pay, as well as their investments.

Triodos is a great example, offering both ethical investment funds, direct investments and cash ISAs. The company screens all of its investments based on its thorough ethical investment policy, and publishes a full list on its website.

Greenwashing in the investment industry

The video below highlights the problem of some 'fossil fuel free' funds not being as green as they could be.

How can I manage my ethical investments?

You will need to decide how to manage your investment.

You can manage your investment yourself, for example by choosing specific stocks and shares. You may save money by doing this, because you won’t need to pay someone else to manage it for you. However, you can lose money if your investments fall, so you’ll probably only want to manage your investments yourself if you feel confident in the area.

Where complex decisions around pensions or involving large sums of money need to be made, seeking professional advice is recommended. You can speak to your bank or investment funding company. However, they are ‘restricted advisers’, meaning that they will only give advice on a limited range of products, namely their own.

Independent Financial Advisers (IFAs) will offer more impartial advice. For a fee, they will help you understand your financial situation and your different investment options. In recent years, there has been a growth in IFAs specialising in ethical options. We have a guide to finding an ethical independent financial adviser.

Citizens Advice also has a useful webpage on getting financial advice.

Passive or actively managed ethical investments

Different investment providers and platforms will manage your investments in different ways. If a fund is ‘actively managed’, a portfolio manager and a team of analysts will be following trends and deciding what to invest in.

If a fund is ‘passively managed’ investments will be more long-term, and there will be less buying and selling. They will often follow well-known indexes such as the S&P 500, and just make investments in whatever companies are on these lists. Some ethical investment funds are linked to sustainability indexes, like the FTSE4Good. These indexes are not always particularly robust unfortunately, meaning you may end up with a fund that is less ethical than you hoped.

When choosing an ethical investment option, you probably want to understand how the investments are managed and what this means for its ethics. E.g. are all investments screened in line with the providers’ ethical policy, or are they chosen based on a sustainability index? For the reason outlined above, lots of the more ethical options are actively managed.

How much does it cost to invest ethically?

Investment funds typically charge a number of fees as a percentage of your total investment (not your total return on investment).

The largest of these fees is the ‘annual management charge’, which will vary depending on how the fund is managed. Lots of ethical investment funds are ‘actively managed’. As explained above, this means that a person (or probably multiple people) will decide what it should be invested in. Actively managed funds – whether ethical or conventional – are usually slightly more expensive, because of the person-power behind them.

Which? says that you should expect the following annual management fees as a percentage of your total investment:

• 0.75% to 1.25% in most actively managed funds
• 0.1% to 0.85% in most passively managed 'tracker' funds

Which? has a good guide to different types of investment fees.

Of course, you may be able to reduce this fee if you choose to manage your own investments, but this is only recommended for those who feel comfortable. You will still be charged for buying and selling your stocks and shares.

There will likely be other smaller fees. In order to keep track of these, a fund should give an Ongoing Charge Figure: this will give you an aggregate amount. You’ll be charged these fees whether you use an investment platform or a direct investor. They usually also apply to any ISAs or pensions you own.

On top of the management fee, you may also be charged a set-up cost (a flat amount) and a monthly or annual platform or administration cost (a flat amount or a percentage). There may also be a ‘exit fee’, particularly for funds that are linked to a specific time period. Look for these additional fees, as they may often be in the small print.

Money Advice Service has a good guide to different fees.

Do ethical investments perform better or worse than conventional funds?

In the past, many people were concerned that investing ethically could not offer reasonable returns. However, over time it’s become clear that this worry has not played out.

In June 2020, research by the global investment company Morningstar found that sustainable investment funds frequently outperformed their traditional investment counterparts. The study analysed nearly 4,900 funds domiciled in Europe and found that nearly 59% of the sustainable funds performed better than the average traditional fund.

It’s worth remembering though that no investment is guaranteed.

While your return on a fund will be based on its performance, cash ISAs and pensions often have a fixed rate of interest.