If you are thinking about dipping your toe into investing then doing so with an investment individual savings account (ISA) can be a great way to start. But how can you be sure that your money is going to companies that do good in the world?
It’s becoming more and more common for people to want their money to be invested in businesses which have either a positive social or environmental impact, or both. One of the easiest ways to do this is with an ethical investment ISA, sometimes known as a ‘green’ ISA.
In this article, we explain what an ethical investment ISA is, and why it’s always important to look under the bonnet of any fund you’re considering investing in to make sure the companies involved have the high environmental, social, and governance standards you want them to.
What is an ethical investment ISA?
An ISA is essentially a tax-efficient wrapper where you can put a certain amount of money each year (£20,000 in the 2023/24 tax year), without having to pay tax on your returns or declare it on a tax return. There are several types of ISA, but the main ones are Cash ISAs and Investment ISAs.
Investment ISAs – also known as stocks and shares ISAs – are set up so that the money you place into the account is invested in a range of assets, potentially allowing for higher gains than cash accounts can provide, but with a higher level of risk. If you’re considering putting money into an investment ISA, you’ll need to be comfortable accepting the fact that you could get back less than you put in. You should also make sure you can afford to leave your savings untouched for at least five years, but preferably longer, as this should give your investments more time to ride out any potential market volatility.
ISA investments tend to be structured as collective investment funds, where your money is pooled with other savers’ money and invested by a fund manager. Your money can be invested in a wide range of assets, including gilts and bonds, cash, property and, of course, stocks and shares.
The idea behind an ethical investment ISA is that the companies that your money is invested in have little to no negative impact on the world, or even make an actively positive impact. Ethical practices a company might follow generally include things like being ecologically conscious and minimising contributions to global warming, protecting wildlife, and treating its workers well and upholding their rights. Ethical investment ISAs will usually tend to exclude companies involved in ‘harmful’ industries such as tobacco, fossil fuels, arms manufacturing, alcohol, gambling and so on.
Ideally, an ethical investment ISA will perform just as well as a “regular” investment ISA, so you won’t be losing out by following your principles when you invest.
How do I know if an investment ISA is ethical or not?
Companies that offer ethical investment ISAs will tend to advertise them as such, though you do still need to be careful if you want to be completely assured that your money is being invested ethically.
This is due to a practice called ‘greenwashing’, a marketing technique used by companies to exaggerate claims that their business is sustainable or good for the planet to appeal to customers.
Companies are able to get away with this due to the lack of an official standard for being ‘green’. A company can use its Environmental, Social, and Corporate Governance (ESG) score to appear eco-friendly, but this scoring system only tends to weed out the worst offenders – so it might not be the very best metric to determine whether a company is especially ethical or not.
So, even if an ISA claims to only invest into ethical funds or companies, you should take a look yourself at what these companies do and decide for yourself whether you want to support them. The ISA provider will usually have a breakdown of the companies the account invests in available online, so you can see exactly where your money is going.
Which are the best ethical ISAs?
There’s no surefire way to make sure your investments are 100% ethical – if a fund or company operates unethically, they are unlikely to shout about doing so!
However, you may have more reason to believe in an ISA’s ethical credentials if the provider is actively involved in welfare or positive climate action and makes it a core part of its operations.
Providers that focus on climate action and sustainability include Clim8, whose investment ISAs specifically invest in companies combating climate change, such as those involved in green energy, climate technology and sustainable food, while still showing the potential for netting the best financial returns.
Another example is Triodos, a European bank that specialises in sustainable practices and charitable causes. Its ISA products are centred around making a positive impact, with different options available that focus on different ethical causes and financial approaches depending on your attitude to risk.
Several fund managers, including Vanguard, have specific ethical fund ranges that are designed to let you invest in line with your values and beliefs.
Do ethical investments perform better or worse than regular investments?
It’s impossible for anyone to predict how any given investment fund will perform, so there are no guarantees that you will be better off going for a particular ethical investment ISA over a regular alternative.
However, there is no special reason why they should generate lower returns – all it means is that you may have fewer options to choose from overall if you commit fully to ethical investments.
It’s worth noting as well that due to their practices, ethical companies are less likely to be hit with fines from regulators for breaching social or governance rules.
Finally…
If you want to learn more about ISAs, you can do so with our article Everything you need to know about ISAs.
Or, if you want to take your ethical investing a step further, our article How green is your pension? contains information on how to make your pension investments as sustainable as possible.
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