We all know money can provide security and freedom — but it also gives us the flexibility to live life on our terms. Still, that’s not an ambition all of us want to come at the cost of our personal morals.
Ethical investing – sometimes known as Environmental, Social & Governance Investing (ESG) – is the natural bridge between the desire to grow your wealth and stay true to your guiding principles.
After all, money and ethics have never existed in isolation.
And that goes not just for making money — but how we spend it.
76% of consumers will stop buying from companies that treat the environment poorly, while 88% will be more loyal to companies that support social and environmental initiatives. [1]
It makes sense, then, that it also matters to us where our money is directed when investing.
Our comprehensive ethical investing guide covers all the ins and outs, so you can make financial decisions that fit your ideals.
- What is ethical investing?
- Does ethical investing work?
- Types of ethical investing
- What are ethical investment funds?
- Benefits of ethical investing
- Disadvantages of ethical investing
- How to ethically invest
- Ethical products
- Ethical investing with Wealthify
What is ethical investing?
The truth is, there’s no single definition for ethical investing, as different people may understand it in different ways.
Other related terms you’re likely to hear include:
- ESG investing
- Sustainable investing
- Socially responsible investing (SRI)
- Impact investing
Sometimes, these terms are used interchangeably.
In other contexts, they may refer to a specific niche or type of ethical investing.
At Wealthify, however, we define ethical investing as:
“Giving your money a chance to grow while supporting organisations that are committed to doing their bit for the future. This is usually done by filtering out harmful activities and including companies that are striving to make a positive difference.” [2]
Does ethical investing work?
Yes, ethical investing works.
Choosing to invest ethically means you can rest assured your money isn’t causing harm — but actively making the world a better place.
You might wonder if prioritising ethical investing means compromising on financial performance, but that needn't be the case.
Ethical investing means exposure to industries like these is either entirely eliminated, or greatly reduced.
At Wealthify, for example, we invest in organisations committed to making a positive impact through their ESG practices.
As a result, our Ethical Plans aim to exclude industries and activities that are considered harmful to society and the environment, including:
- Tobacco
- Gambling
- Controversial weapons
- Adult entertainment
We also aim to limit profits received from other major polluters and contributors to climate change, including: gas, metals, oil, mining, alcohol, coal, chemicals, and airlines.
Types of ethical investing
We’ve already touched upon ethical investing terms. And, while they’re not always used with consistency, it can be helpful to get to grips with their most accurate definitions.
ESG Integration
This is about keeping ESG factors in mind when building an Investment Plan.
In some instances, that might be as simple as checking a stock’s ESG rating; in others, a poor ESG rating might be the sole decision-making factor for an investment manager.
This makes it a case-by-case approach, different to exclusionary funds, where certain sectors are always off limits.
Socially Responsible Investing
This is about more than just the exclusion of problematic funds.
Instead, it means proactively choosing to be socially conscious during the financial process, channeling money towards companies trying to do good in the world.
Impact investing
From climate change to poverty, this refers to companies that are actively striving to resolve or improve ESG issues. For example, investment in a renewable energy company could be classed as impact investing.
What are ethical investment funds?
Ethical funds provide a low-effort way to get into ethical investing.
Following new rules implemented by the Financial Conduct Authority (FCA), firms providing ethical investment funds “need to ensure their sustainability references are fair, clear and not misleading, and proportionate to the sustainability profile of the product and service.” [2]
Added to this, there are also four new investment labels to bring greater transparency for consumers.
However, they don’t all operate in the exact same way. Let’s take a look.
Negative and positive screenings
Not all ethical investment funds were created equal. Some funds will perform negative screenings to help identify and exclude harmful activities and industries, while others also use positive screenings to understand a company’s ESG stance.
With negative screenings, there’s no set rule on exclusion and, on the whole, policies will differ from fund-to-fund.
Some focus on what are sometimes known as ‘sin stocks’.
That is, organisations involved in tobacco, gambling, weapons, and adult entertainment.
Other funds may go further still, excluding activities and sectors such as animal testing and deforestation.
Ethical funds will also have different levels of tolerance. For example, some opt to remove unsuitable activities completely; others may allow investments in companies involved in harmful sectors, as long as they earn no more than 10% of their overall profits from the harmful activity in question.
For ethical funds with positive screenings, they’ll consider ESG criteria, assessing things like:
- How much non-renewable energy a company uses.
- Its diversity and equality stance.
- How open and honest it is with its stakeholders and shareholders.
These are the factors that determine a company’s ESG score, which will then decide how likely they are to be included in the fund.
Active vs passive ethical funds
Ethical funds can either be active or passive. With actively managed funds, an investment manager will continually monitor companies to ensure they’re still maintaining high ethical standards.
They can even use their shareholder voting power to help shape the strategic direction and ESG policies of companies they choose to invest in.
Because active funds require a lot of work, they cost more than other types of funds.
On the other hand, passive funds are cheaper, but don’t have the same scope to push for change and dig into a company’s true ethical credentials. As a result, passive funds are more likely to select companies with fixed ESG scores (which may mean cutting out organisations striving to be better).
Benefits of ethical investing
In a nutshell, it feels good to grow your money without causing harm. This is the obvious benefit of ethical investing — and the one that will first attract most people to this financial strategy.
But there’s more to it than just that, so let’s get into the other pros of becoming an ethical investor:
Sustainable returns
There’s good evidence showing that lots of socially responsible funds have returned strong results, meaning you don’t have to compromise on your long-term financial goals. [3]
Aligned with your values
We all know it feels good when you stay true to yourself. What could be better, then, than trying to grow your money while staying true to your values in the process?
Better for the planet
Overall, ethical investing is going to do more good for the planet and society than conventional investing. It channels money towards neutral and positive industries, preventing that same money from being funnelled into harmful sectors.
Disadvantages of ethical investing
Nothing is without nuance, and it’s also worth considering the potential disadvantages of ethical investing:
Higher fees
Because of the extra effort required to be selective with funds or investments, the associated management cost also goes up.
Greenwashing
Greenwashing is when companies use misleading marketing and communications to present themselves as more environmentally friendly than they really are. Thankfully, the FCA rules we mentioned earlier were introduced to prevent greenwashing and, in turn, protect customers from it.
Returns vs. Ethics
There’s a lot of evidence to suggest that, when managed well, returns on ethical investments are (on average) at least as high as conventional investing. Still, there’s always the chance that your returns could be lower. Plus, as mentioned above, higher fees can also eat into your returns. So, in some instances, there may be a trade-off between your potential gains and values.
How to ethically invest
Here are the key steps to follow when it comes to how you can ethically invest.
- Know your values: If you’re going to stay aligned to your values, you need to know what those values are. Figure out where your boundaries are, what’s most important to you, where you might allow flex — and what is a total no-go.
- Consider your current portfolio: Are you already investing? If so, you’ll need to see if the live investments you currently have align with the values you’ve landed on. If not, that may mean changing your investment manager or provider.
- Decide involvement level: If you’re thinking about ethical investing, it may be important to you to have some involvement in the decision-making. Of course, there are options to invest ethically without being as hands-on, too. That’s why you need to decide now how active you’d like to be in the process.
On one hand, you could opt to create your own DIY portfolio.
This will empower you to personally select, investigate, and make the final decision on who and what you invest in. On the other, this can be a lot of work and upkeep; if you don’t have the time or confidence, then an investment manager or provider could be a good solution.
- Figure out where you can invest: This means exploring potential businesses, checking their ESG ratings, and getting into the thick of decision-making.
You could also explore ethical investment providers, with products such as an Ethical Stocks and Shares ISA meaning you don’t have to pay tax on any gains made (as long as you stay within your ISA allowance).
- Design a strategy: A strategy is the starting point for all good decision-making. With your foundation laid, it’s time to plan ahead. The following questions might help you kickstart your ethical investing strategy:
- What is your financial goal?
- What will that money be put towards?
- What timescale are you working to?
- How much are you prepared/able to lose?
- What is your appetite for risk?
- Monitor your ethical investments: As with all investments, their value can go down and up at any time. So, regularly reviewing them is important to ensure they’re going the way you want (not that this means you should make knee-jerk decisions).
Which products can you ethically invest with?
If you’re officially kicking off your ethical investing journey, now is a great time to look at what products are available to help you get started.
With a provider like Wealthify, you have the option to invest ethically in a number of different ways. These include:
Ethical Stocks and Shares ISA
Our Stocks and Shares ISA offers an effective way for you to save for your long-term goals. With low, transparent fees, our Ethical Plan means you needn’t compromise on your values. As this is a flexible ISA account, you can also withdraw money and return it in the same year — without it impacting your allowance.
Ethical Self Invested Pension Plan
With a Wealthify Self-Invested Pension, you can start contributing towards your future retirement from as little as £50. By choosing our Ethical option, build towards a future that aligns with your ambitions and values. Plus, you’ll receive automatic tax relief with a 25% top-up on personal contributions.
Ethical Junior ISA
Everyone wants the best for their children. And, by opting for a Wealthify Ethical Junior ISA, you can help prepare for their financial future. At the same time, it’s about knowing your investments aren’t causing harm to the society and environment they’ll later inherit.
Ethical General Investment Account
If you’ve used your annual ISA allowance with a Wealthify Stocks and Shares ISA, you could carry on investing ethically with an a Wealthify Ethical General Investment Account (GIA).
Investing ethically with Wealthify
Beginning your ethical investing journey with Wealthify could be good for various reasons, including:
- The potential to start growing your future wealth.
- The chance to do so ethically.
- The ease to pick a Plan and risk-level that works for you.
Ready to start your ethical investing journey? Click on the banner below to get started.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
