ETHICAL INVESTMENT
WANT TO HELP THE WORLD AND YOUR WALLET? ROSIE MURRAY-WEST TAKES A CLOSER LOOK AT ETHICAL INVESTING
How opting for an Isa can help save the world
ETHICAL investment used to be a niche part of money management, but how your money is invested is now a mainstream concern. Figures from ethical bank Triodos show that one in five British investors now chooses to invest sustainably, while financial advisers and investment platforms say they’ve seen increased demand for Isas and other products with an environmental slant.
‘We’ve seen demand pick up for funds focusing on environmental, social and governance issues in the past couple of years,’ says Juliet Schooling Latter, research director at Chelsea Financial Services. ‘People like Greta Thunberg and David Attenborough have really managed to engage with the world about the problems facing our planet, and people are caring more and more about how companies treat employees and their communities.’
But for those of us wanting to open an Isa that benefits the world as well as our wallet, the choices can be daunting. Here’s how to get started.
Know your options
Putting your money into a sustainable Isa isn’t as simple as ticking the ‘green’ box on the application form. Instead, you will need to choose between products that all claim to be green or sustainable but may have very different underlying criteria.
At the most basic level, you could put your money into a cash Isa with an ethical bank or building society. Ecology Building Society, for example, has a cash Isa paying 0.3 per cent and you can withdraw the money whenever you like. The building society uses its money for sustainable products.
Interest rates are very low right now, however, so many of us will turn to stocks and shares Isas for a better return. There are green options here, too, but as financial adviser Philippa Gee points out, they are not all the same – with many funds billed as ethical or environmental. ‘You need to drill your choices down further to locate the fund that suits your specific requirements,’ she explains.
Finally, there are ethical Ifisas – Innovative Finance Isas. Offered by platforms such as Abundance and Triodos, these let you use your Isa allowance to invest directly in ethical projects. It is important to note that Ifisas are seen as riskier, for more sophisticated investors, as you are investing directly in early-stage projects rather than in a range of established companies.
Choosing funds
The vast majority of ethical investors choose to invest their ISAs, pensions and other savings through pooled funds, where your money is collected together with that of other investors and then invested in a number of companies.
Finding out whether a fund is as sustainable as it might sound on the label can be tricky. Billing a fund as ethical can be as simple as saying that the fund manager has screened out some sectors of the stock market they consider harmful – or as complicated as the fund weighting every stock against a set of environmental, social and governance (ESG) principles.
Investment platform Interactive Investor has the ACE 40 list, which is a good place to start. ACE stands for Avoids, Considers, Embraces, which are three different ways to consider ethical investing.
The 40 funds it recommends are divided into these three categories, with Avoids funds focusing on simply excluding companies, sectors or specific business practices, and Considers funds carefully considering a range of ethical and/or ESG issues or themes when balancing positive and negative factors. Funds in the Embraces category focus on companies delivering positive social and/or environmental
outcomes. These funds are available on other platforms, too, if you aren’t a client of Interactive Investor, the full list is available at ii.co.uk/ii-ace.
Another place to look is goodwithmoney.com, which awards ‘Good Egg’ marks for sustainability. You can check a fund’s financial performance, together with a list of the companies it invests in, at trustnet.com.
Juliet, at Chelsea Financial, says that while checking what firms a fund invests in is important, she also thinks it is vital to check how the fund manager is engaging with the companies about sustainability. ‘Having managers actively engage with companies that are only just starting their ESG journey is just as important as investing in companies already there.
‘Some of my favourite funds in this area are Ninety One Global Environment, which is targeting companies contributing to a decarbonised world. Pictet Global Environmental Opportunities has identified nine environmental challenges and all investments must operate within a safe operating environment for each of these challenges. And there’s also BMO Responsible Global Equity.’
Building back better
Many people worry that, if they choose an environmental option for their investments, they will find that they do not perform as well as ‘mainstream’ investments. However, recent studies suggest this is not the case. Figures from investment service Willis Owen show that ethical global funds, UK funds and equity income funds out-performed their peers last year, and experts say there is no reason why this should not continue.
Laith Khalaf, financial analyst at investment group AJ Bell, says the new US Presidency is good news for sustainable investing, while other factors should also help.
‘Of particular focus right now are environmental matters and the issue of climate change,’ he says. ‘The
Green investment funds out-performed their peers last year. This looks set to continue
developed world only appears to be going in one direction on this front, which should be positive for companies operating in this area.
‘The election of Joe Biden as US President has given this trend additional impetus.’
Rebecca O’Connor, head of pensions and savings at Interactive Investor, agrees that ethical investing can bump up returns.
‘There is now a lot more choice for investors who want to match their money with their morals, without sacrificing returns,’ she says.
‘There are now plenty of niche funds, investment trusts and ETFs [exchange-traded funds] that specialise in focus ethical areas, such as renewable energy or social housing, and also vehicles with more general, catch-all approaches to sustainability.
‘As the world’s biggest companies are required to do more on ESG, it has almost become hard to avoid some degree of sustainability in a standard investment portfolio, whether you mean to or not.’