What is an ethical Stocks & Shares 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.
Through a Stocks and Shares ISA you essentially help fund companies – both good and bad - and like all investments it is not without financial risk.
On the positive side, your investment can support everything from renewable energy to more sustainable farming. On the negative side, they may be riddled with all the same issues as other investments or bank accounts. Your money might be going into fossil fuel exploration; it might be linked to cluster munitions or other weapons; or it could be funding animal testing.
There are many approaches that companies can take to creating an ‘ethical’ fund or selecting ethical investments. Some investors will focus on excluding companies which, for example, are involved in problem sectors such as fossil fuels, tobacco or arms. Others may take a more ‘positive approach’ only investing in companies that meet certain criteria, e.g. are supporting climate transition, such as renewable energy companies, or have plans to meet international decarbonisation targets.
Some companies however are not transparent on what approach or criteria they use.
The platforms from which you buy your Stocks and Shares ISA often will not manage the actual funds you invest in. Instead, they will act purely as an intermediary between you as the customer and the investment company itself.
How do Stocks and Shares ISAs work?
A Stocks and Shares ISA usually acts as a ‘wrapper’ for your investment. Essentially, it is a low-tax way to invest in a fund or sometimes into stocks and shares directly. This means that you could choose any fund from our ethical investment fund guide or our fossil free fund guide and invest money into it from within a Stocks and Shares ISA.
Some of the funds allow you to do this directly from their own websites. For others you can only invest via an ISA through an 'online investment platform'. Eight of the nine providers in this guide are ‘investment platforms’, which say that they will help you to invest sustainably or ethically through your Stocks and Shares ISA. They will typically have a website or app which will ask you a series of questions about your ‘risk profile’ and ethical values. The more automated of these are sometimes rather futuristically called ‘robo advisors’. The rise of these platforms has made investing much cheaper, without having to rely on traditionally expensive financial advice.
The best funds (highlighted in our ethical investment fund guide) will not be available on all of these platforms. For example, one of our best buy ethical funds WHEB, is only available via two of the platforms we have covered here: Big Exchange and Hargreaves Landsdown. Some of the platforms use other approaches and funds we have not reviewed in our investment fund guides.
The Triodos Stocks and Shares ISA works slightly differently: it offers investments in Triodos’ own funds, which aren’t available via any other platform. We have included it in this guide because it was one of our two best buy ethical funds and you can invest into it directly on the Triodos website.
While most of these platforms work to help smaller investors find the right ‘funds’ (which each contain many companies), it is also possible to buy individual company shares directly on some of these platforms to hold in a Stocks and Shares ISA. If you’re wanting to do this, you’ll need considerable financial expertise, research and/ or advice, so we’re not covering this approach to investing in this guide.
Stocks and Shares ISAs vs Innovative Financial ISAs
Both Stocks and Shares and Innovative Financial ISAs (IFISAs) allow you to invest in companies or projects. However, unlike a Stocks and Shares ISA, an IFISA allows you to provide a direct peer-to-peer transfer of money to a company or project, on which you hope to make a financial return, rather than buying stocks or shares floated on the market.
IFISAs are generally more risky than Stocks and Shares or Cash ISAs but will give you much greater control over how ethical each element of your investment is. See our guide to Innovative Financial ISAs for more information.
Junior Stocks and Shares ISAs
A parent or guardian can open a Junior Stocks and Shares ISA for their child as a tax-free way to save on their behalf. The money in the account belongs to the child, but they can’t withdraw any of it until they’re 18. The Junior ISA limit is £9,000 for the tax year 2021/22 – meaning that is the maximum amount you can save in this way for that year.