Ethical Investing: Ethical Funds, ISAs and Pensions in the UK

What does ethical investing mean?

Ethical investments are investments made with a view to the personal ethics, morals and social values of investors. It means investments made specifically in companies that are socially responsible, make healthy and legal products and stay away from unethical practices. For example, investors whose core values are that alcohol and tobacco are unhealthy will not invest in companies that make or market alcohol and tobacco-related products. 

The primary purpose of ESG or SRI investing is to support businesses that make a positive impact. The secondary purpose, of course, is to generate good returns on the investment. The process of ethical investing focuses on social, environmental, and governance factors while investing and generating profits for investors.

Types of ethical investments

Ethical investments vary with the different values they’re based on. For instance, some ethical investments are driven by social values, while others are based on religious, political, or environmental values.

• Ethical investing driven by moral values: This category of ethical investing is driven by the moral values of investors. They invest in companies that support the same values as the investor, generally avoiding companies involved in tobacco, alcohol, firearms, etc. The other alternative for ethical investors is to invest in socially responsible investment (SRI) funds that invest only in socially-responsible businesses and avoid investments in businesses related to firearms, alcohol, and tobacco.
• Investments driven by religious values: Some ethical investors invest in faith-based funds. It allows them to invest in companies that align with their religious beliefs. You can’t buy stock in a church, but religious investing will generally avoid stocks on alcohol, tobacco or gambling, for example, and support those that champion human rights. There are, of course, fundamental differences between investing among the major religions that we haven’t space to fully unpack here. 
• Investments driven by environmental values: In addition to moral, social, and religious ethics, many ethical investors opt for green investing. They prefer investments in companies using environmentally friendly products and processes that do not harm the environment. Thus, not investing in companies making single-use plastics is a part of ethical investing based on environmental values. Green investing also focuses on recycling, climate control, water usage reduction, conservation of natural resources and producing alternative energy sources.

Ethical investment funds

An ethical investment fund’s goal is to prioritise environmental, social and corporate governance factors in its investment decisions while netting positive returns for investors. Money pooled together from multiple investors creates an “investment fund”.

The fund manager makes the ESG investment decisions and selects from different types of investments, including stocks, bonds, and government debt. Some ESG investment funds are more ethical than others, as fund managers use different criteria and methods to achieve this goal.

Ethical stocks and shares ISA

An ethical ISA gives individuals the chance to invest in a socially conscious manner by avoiding investments in unethical and controversial industries. Investors can choose ethical stocks and shares ISAs that exclude companies that are involved in fossil fuels, tobacco, or arms.

The benefit of investing in ethical stocks and shares ISA is that investors can grow their wealth, and their portfolio can reflect their personal values regarding global sustainability while paying low fees.

Moneyfarm has cherry-picked high-quality, ethical investments via an ESG screening to build you ethical ISA growth portfolios that are fully diversified and tailored to your level of risk.

Some companies that invest in ethical stocks and shares ISAs may be transparent about how they make decisions when they choose investments and have strict environmental, social and governance ESG policies. However, some companies aren’t transparent about the criteria they use, so ensure that comprehensive research is conducted before investing.

Ethical pension

An ethical pension is a pension whose investments overlook companies and industry sectors that harm society or the environment or go to great lengths to harm things actively. Ethical pension funds bring ESG investing to retirement planning by ensuring the underlying investments meet environmental, social and governance criteria. 

Pension holders should be more aware of how their pensions are invested. Pensioners need to find out from their pension providers how much control they have over the investments held in their portfolios. With a workplace pension, an employee may be able to select from a range of ethical funds offered by the employer. 

With a Self-Invested Personal Pension (SIPP), an individual can choose which investments they want to hold in their pension from an extensive range of assets. When picking an ethical pension, the fund’s objectives, asset management and its top 10 holdings should be considered when making a decision. Also, ensure the pension is regulated by the Financial Conduct Authority (FCA).

Ethical companies to invest in

There are several ethical companies to invest in, and they pan across several sectors. Here are some ethical companies investors can choose to put money in.

• Renewable energy companies such as PG&E, First Solar, and Green Energy UK.
• Green transportation companies such as Tesla, NIO and ChargePoint Holdings.
• Meat alternative companies such as Beyond Meat and Agronomics.
• Waste reduction companies such as Republic Services and Waste Management.
• Alternative agriculture companies such as United Natural Foods and Mowi ASA
• Water purification companies such as York Water Company and United Utilities.
• Healthcare companies such as Merck, Johnson & Johnson, and MeVis medical solutions.

Why is ethical investing important?

Ethical investing is beneficial for both investors and society at large. For investors, it can mean greater satisfaction when they invest in businesses that they support. Investors can benefit financially and emotionally by investing in companies they share core values with. Investing, fundamentally, plays a critical role in society while generating returns in the process. Thus, ethical and sustainable investing can be a win-win situation for both investors and the world.

The growth in ethical and sustainable investing promotes more and more companies that follow ethical business practices. Sound practices are encouraged, and harmful practices are discouraged. As a result, ethical investing can help support the long-term well-being of the environment, among other ethical concerns.

Does ethical investing work?

Ethical investing can be great for the emotional and personal satisfaction of investors. In addition, it can be reassuring to avoid funding companies involved in malicious and harmful practices. However, not investing in unethical companies does not eliminate them – these companies are still able to raise capital from other investors looking for high returns. 

In terms of generating returns, ethical and socially responsible investment funds have generally performed well, matching traditional investments in many cases. In fact, in 2019, many sustainable and ethical investing funds performed better than their traditional counterparts. Moreover, during the Covid-19 pandemic, when the world’s attention was placed even more on sustainability and ethics, ethical investing funds again performed well when compared to their conventional counterparts.

However, it’s important to understand the various challenges associated with ethical investing. The creation and management of ethical investment portfolios involve a lot of research to ensure that the investments align with the values of the investors. Therefore, they can come with high fees. Additionally, ethical investors may need to sacrifice their returns at times to comply with their ethics and values.

Best ethical investment funds in 2023

A large number of funds support ethical investing. In addition, a new family of ethical funds, called impact investing funds or ESG funds, have cropped up in the investment world and form a considerable part of modern-day investment portfolios. Some picks for the best ethical investment ETFs and mutual funds for 2023, based on the returns generated, are as follows:

• Vanguard FTSE Social Index Fund: The fund is invested in large and mid-cap companies. Its top holdings include Apple, Tesla, Amazon and Alphabet Inc. The fund reported a return of 13.5 % over the past year and 18.97 over the past three years.
• iPath Series B Carbon ETN: The fund is an exchange-traded note that provides exposure to Barclays Global Carbon II TR USD Index. It provides exposure to the carbon price. The fund had a one year return of 76.65%. 
• KraneShares Global Carbon Strategy ETF: This fund tracks the most traded carbon credit futures contracts and is benchmarked to IHS Markit’s Global Carbon Index. The fund had a one year return of 62.09%.

Here are some of the best ethical investment funds that have had excellent track records but have had a low or negative performance as of 2022 due to COVID-19.

• Baillie Gifford Positive Change Fund: The fund invests in companies of any size, sector, or country; however, the investment is limited to companies creating a positive impact. Its holdings include Tesla, Moderna, Illumina, and other companies addressing issues related to healthcare, education, and the environment. The fund reported a return of – 15.39%  over the past year and 26.23 over the past three years.
• Baillie Gifford Global Stewardship Fund: This ethical investment fund invests in companies that are dedicated to social issues, environmental challenges, and corporate culture. The companies in the Global Stewardship fund behave in the best interests of all their stakeholders. The fund reported a return of – 23.83% over the past year and 16.52 over the past three years.
• Royal London Sustainable Leaders: This ethical fund has at least 80% of its investments in UK companies listed on the London Stock Exchange. Its holdings cut across various sectors and countries and include stocks like AstraZeneca, SSE and Sage Group. This fund reported a 7.77% annual return on investment last year.

Overall, ethical investing is, in many ways, an ideal form of investing for the future. Know how SRI investing works and how it generates excellent returns for investors while allowing them to support their moral, social, religious, and environmental values. Financial advisers can also help with the process of picking an ESG portfolio that reflects personal values.

FAQ

What are unethical investments?

Unethical investments are investments made in companies and industries that are harmful or partake in harmful activities, but it also depends on an investor’s personal ethics, morals and social values. But the generation norm for unethical investments is ‘sin stocks’ from companies in the tobacco, alcohol, sex-related industries, gambling, and weapons manufacturers industry.

What is an example of ethical investing?

Ethical investing is for investors who want their investments to be used for good causes. An example of ethical investing as an investor who thinks weapons are harmful is to avoid weapon manufacturing companies or companies with investments in weapon production companies.

What are the benefits of ethical investing?

Investors will feel better as their investments align with their personal ethics, morals and social values. It drives change and encourages companies to implement and improve their ethical practices.