Have you ever had the opportunity to invest, but held off because you didn’t want to fund companies or industries that didn’t align with your ethical values?
Although we understand this is a cause for concern for many people, we don’t believe it’s one that should necessarily hinder your wealth-building plans.
That’s why we created a sustainable Stocks and Shares ISA option — to hopefully not only build your money in a tax-free way, but build a better future for us all, too.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
- What is an Ethical Stocks and Shares ISA?
- How does ethical investing work?
- Benefits
- Disadvantages
- How do I invest ethically?
- Summary
What is an Ethical Stocks and Shares ISA?
Rather than thinking of this as a standalone financial product, an Ethical Stocks and Shares ISA is one that’s specifically designed to invest with ethical principles in mind — and your values at heart.
That means the money held in an Ethical Stocks and Shares ISA should only be invested in companies that are meeting their promises to uphold their ethical standards.
For example, by investing in companies that are striving for more gender equality for their employees, or by excluding companies that fund the manufacturing of weapons.
Simply put, it’s a chance for you to use all the tax-free benefits of a Stocks and Shares ISA (investing up to £20,000 per tax year) — while knowing the companies you’re invested in are committed to ethical values.
How does ethical investing work?
Ethical isn’t a catch-all term. ‘Green’, ‘sustainable’, ‘socially progressive’, ‘environmental’, ‘governed’; all of these words are often used interchangeably.
And what one person defines as ethical, might not match someone else’s opinion.
Investing in funds that focus on Environmental, Social, and Governance (ESG) issues are often used as a base line for investing ethically.
With Wealthify, for example, we’ve developed our Ethical Investment Plans to aim to exclude industries and activities that are considered harmful to society and the environment, including:
- Tobacco
- Gambling
- Controversial weapons
- Adult entertainment
The fund providers we use have a 10% (maximum) tolerance when they screen for excluded activities. This exclusion process is called ‘negative screening’.
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.
The 10% threshold
There’s also a bit of nuance involved.
One fund might completely de-invest in a company that’s involved with deforestation. Whereas another might accept this, as long as it’s not making more than 10% of its profits through that activity.
It can be difficult to trace a parent company or supplier’s ethical standards; their individual policy may be counterintuitive to the effort that the ethical fund is trying to implement.
This, in addition to the subjectivity of ethical investing, is why there’s a maximum threshold of 10% in place for Wealthify’s Ethical Investing Plans. For instance, one investor may care deeply about climate change, but not care as much about unfair labour practices — while that may not be true for the next investor and their personal values.
Either way, this minimum standard (where at least 90% of the profits haven’t come from ‘sin stocks’ or their activities) would still be considered far more ethical than an average open-door investment fund that doesn’t filter those out.
Benefits of Ethical Stocks and Shares ISAs
There are a range of advantages to using a Stocks and Shares ISA and choosing to invest ethically.
Arguably, the main one being you can invest up to £20,000 every year, tax-free.
But on a more personal level:
- You can invest in a way that complements your individual values and ethical preferences.
- You can exclude industries/companies that go against your religious beliefs or faith.
- And be part of a movement — assuming that the more people choose to invest ethically, the higher the demand will be for organisations to embrace the same practices.
Disadvantages of ethical investing for Stocks and Shares ISAs
If you’re investing in a DIY Stocks and Shares ISA, then you may need a high level of research and be actively ‘on top’ of your portfolio.
This wouldn’t be the case with Wealthify, as our expert Investment Team manages our customers’ portfolios for them.
But if going for the DIY route, it might be more time-consuming for you to keep your ethical investments as financially competitive as non-ethical assets.
Greenwashing happens!
Sometimes companies can embellish their marketing to appear to be greener than they actually are. In recent years, the tactic of ‘greenwashing’ has become more noticeable. And it isn’t just applicable to fast fashion brands, it happens with stocks and shares, too!
As we see an increase in public demand for reputable ethical investment options, it’s important that you are able to identify which of the funds can be trusted to deliver what they are promising. The Financial Conduct Authority (FCA) has introduced new rules to tackle this, meaning firms providing ethical investment funds now “need to ensure their sustainability references are fair, clear and not misleading, and proportionate to the sustainability profile of the product and service”.
If you’re opting for a DIY Stocks and Shares ISA and want to focus only on investing ethically, you may need to give more of your time compared to an account that’s managed for you. Not only for monitoring the markets, but also for tracking how well the funds you’re investing in are sticking to their ethical commitments (and not misleading their investors).
You may want to give an extra layer of attention to determine when a company or fund is truly standing by their values. The FCA has asked firms to add one of four labels to their ethical funds to add transparency for the public consumers, which will hopefully help. Keep an eye out for those across the various investing platforms going forward.
Ethical investing can come with higher fees.
If you’re investing in funds that need to be more actively monitored, this extra attention will be reflected in the fees you pay.
With Wealthify, for example, we try to keep our fees as low as possible for our customers. Our Ethical Investment Plans are approximately 0.70% for the average investment costs and our simple fee for using the platform is 0.6%, but you can take a look at our fees in detail here.
How do I invest ethically?
You have two options for investing ethically in a Stocks and Shares ISA:
- You can open a Stocks and Shares ISA that lets you invest in a DIY-style:
This would give you freedom and flexibility to buy and sell investments as you please. Although, it also means you’d need to take a much more active role in researching funds and keeping up with market movements. - Or open a Stocks and Shares ISA with a provider that will manage it for you:
This option lets a professional with investing knowledge and expertise take care of your portfolio for you using their own methods, data tools, algorithms, etc. With Wealthify, for example, we have a team of investment experts that prioritise investing in a range of ethical funds designed with your preferences in mind.
Summary
If you’re looking for a green Stocks and Shares ISA, researching a provider that can offer you an ESG or ethical investing strategy would be a good place to start.
You’ll also need to decide whether to invest on a DIY-basis or have a professional manage it for you.
Comparing providers with the above in mind should help you narrow down the ISA that’s right for you — and open the door to your sustainable investing journey.
How to open an Ethical Stocks and Shares ISA
While we can’t walk you through how to open other provider’s ISAs, we can give you the steps to open one with us.
Wealthify has an ethical option for our Stocks and Shares ISA, Personal Pension, Junior ISA, and General Investment Account.
All you need to do to get set up is to start your financial product (i.e. a Stocks and Shares ISA), whether that’s opening a new account or transferring in from an existing ISA.
Then select the ‘ethical’ option when asked your preference.
If you already have a Wealthify Stocks and Shares ISA, open your app or sign in to the online dashboard and select your Plan.
Under Plan Details, you should have the option to switch from Original to Ethical. Once you’ve selected this, the Investment Team will start to realign your ISA to include only ethical investments instead. It’s as simple as that.
If you need a hand, our helpful Customer Care Team will be happy to help. Head to our Help Centre to reach out to them.
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.
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