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Ethical Investing – can you really make a difference?

Ethical investing allows you to focus your money on making the world a better place. Investors seeking to have an impact can feel good about how their money is being used. However, ethical investing is not as straightforward as one might think. 

Each of us has a different view as to what we consider ethical and of course, fund managers are faced with the same challenge. That said, ethical inventing can have a hugely positive effect as well as contributing to your portfolio.

In this post, we arm you with the important information you need to decide which path is for you. We’ll run through our favourite ethical investment platforms and share the top-performing ethical funds to align with your investment goals. Plus, there are a few FREE BONUSES if you decide to open an account.

What is ethical investing?

Ethical investing has been used as a catch-all term for various forms of investing. This includes Environmental, Social and Governance (ESG), Socially Responsible Investing (SRI) and Impact Investing.

Historically, the market classified this investment style as Socially Responsible Investing (SRI), so you may hear this or ESG used interchangeably.

What’s more, ethical investing is difficult to define precisely as each investor’s definition of ethics may differ. This makes choosing an ethical investment very personal.

Interestingly, ethical investing is not a new concept. It actually dates back to biblical times with some religions still mandating guidelines and laws on how to generate financial returns both ethically and sustainably.

Of course, nowadays ethical investing has become synonymous with environmental movements and those of us trying to make the world a better place.

It’s almost become fashionable to ethically invest. As we explore ethical investing deeper in this article, you’re going to see the impact ethical investing can have and how it could improve your portfolio as well as your future.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

Ethical investing - What you need to know

  • Ethical investing is the practice of selecting investments based on ethical or moral principles.
  • Selecting investments based on ethics offers no guarantee of performance.
  • Ethical investors typically avoid investments from ‘sin stocks’. Includes companies involved with stigmatized activities such as gambling, alcohol, smoking, and firearms.
  • Analysing investments according to ethics should also include reviewing whether the company’s actions align with their commitment to ethics and their historical, current, and projected performance.

From Investopedia (source).

The growth of ethical investing

Ethical Fund Growth

Source: Investment Association

Pleasingly, ethical investing has grown in popularity over the last ten years. Retail investors are placing over ten times the amount of money in ethical funds as they did a decade ago.

In response to investor money flowing into ethical investments, new funds and platforms have been launched. As a result, the huge range of options can make getting into ethical investing daunting.


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Will ethical investments perform better?

Certainly, ethical investing has increased in popularity over the last few years, but are investors sacrificing performance for their moral outlook?

According to Morningstar’s research (source) that reviewed fund performance over a ten year period, sustainable funds outperformed their benchmark on average.

Furthermore, this research is reinforced by a 2020 Moneyfacts survey (source). The analysis of 140 ethical unit trusts showed ethical funds overall had grown by just over 4% in the past 12-months (up to 1 July 2020). This was in comparison to a contraction of nearly 1.5% for those investments not in the ethical category.

Overall, when looking at the levels of growth over the past five years, ethical investments achieved just over 41% growth. A stark contrast when compared with those not listed as ethical at only 32%.

Survivorship bias

When reviewing historical performance, we have to consider something called survivorship bias. The research shows us that just over two in ten sustainable funds that existed ten years ago are no longer around.

It’s not unusual for underperforming funds to be cut. It makes fund providers overall returns look better by cutting the losing funds from their portfolio.

While this may seem high, by comparison, according to Morningstar, only 46% of traditional funds are still running after ten years.

So, by being less likely to be cut, this suggests a sustainable or ethical fund may actually perform better by virtue of the fact they are simply around longer.

Is ethical investing risky?

By its very nature, ethical investing limits the number of companies you can invest in. By setting such restrictions on your portfolio, you typically limit access to certain verticals or asset types.

A portfolio that’s focused on improving the environment won’t have exposure to oil and gas shares, and rightly so. However, it will most likely focus your portfolio on tech stocks. Of course, tech stocks have performed great over the last ten years, but so did dot com stocks before that bubble burst.

To protect themselves against risk, most prudent investors ensure their funds are widely distributed across sectors to ensure a failure or hiccup in one industry doesn’t impact their whole portfolio. And to do that, you want access to a wide range of asset classes and stocks, which ethical investing doesn’t necessarily provide.

As more and more money is pushed into ethical funds, more money is also pushed into the stocks those funds hold. Consequently, this could in fact be helping to drive up the valuations of those companies deemed to be green, responsible or ethical.

The cynic might think that this actually drives corporate strategies. If you knew your share price would grow if you could show the market how ethical you were, would you do it?

That said, does it really matter? If companies are being forced to consider their environmental impact, look after employees and avoid controversial business practice, surely that’s a good thing? Such is the power of more people demanding ethical investments. It’s simply market forces at work.

Ethical investing - are we seeing greenwashing?

With the rise in popularity of ethical investing, some providers have been accused of ‘greenwashing’. This is where a fund, looking to acquire funding from ethical investors, adds terms like ‘green’, ‘sustainable’ or ‘ethical’ to a fund name.

It’s important to do your own research and choose a fund carefully based on your own investing criteria. For this, you can look at a funds factsheet to see what companies the fund manager is investing in. Fund factsheets can usually be found on your investment platform site or the providers.

You can see the top holdings for Vanguard‘s recently launched ESG Fund below:

Vanguard ESG Developed World All Cap Equity Index Fund (UK) Holdings

Ethical investing - what issues do you care about?

The top holdings of Vanguard’s ESG fund, mentioned above, are companies such as Amazon and Apple. Both have been accused of having poor labour conditions for employees in their factories and warehouses.

Companies including Facebook and Microsoft have also been listed, both of which have been accused of overstepping and leveraging their corporate might.

And then there are those such as Tesla, which has also been under fire for mining the earth’s resources to make batteries.

Many people won’t consider these companies necessarily a problem. However, some might hold firm opinions and wish to avoid them.

Because of this, choosing a fund can be difficult and you need to consider what’s important to you. Certain funds will screen for environmental issues or human rights issues but without checking the fund’s makeup, how do you know if the manager’s ethics match yours?

Reading the funds factsheet will give you a better understanding of what the fund is focused on and how the fund manager will choose investments.

If choosing a fund sounds difficult, then we have linked to certain investment platforms below that are focused on allowing you to invest according to your own ethical goals without having to do hours or research.

Does ethical investing cost more?

Typically, yes. In the same way that you may pay more to buy meat from a local butcher or buy organic produce, ethical investing carries that ‘premium’.

Reasons for this include the more research time it takes for fund managers to assess a company’s ethical credentials.

Actively managed funds, in general, carry higher costs than passive trackers and adding the ethical tag on top to either of these will cost more.

Weathify, for example, charges an additional 0.40% for their ethical portfolio versus their standard fund.

There are some exceptions, such as the Vanguard ESG Developed World All Cap Equity Index Fund. This only charges a 0.20% annual charge which is extremely good value. However, it is a tracker fund which means it only aims to track, or match, the market’s performance and not beat it.

How to choose an ethical fund

A great starting point is looking at the funds listed on Interactive Investor’s Ethical Investing page. Interactive Investor also manages their own Ethical Growth Portfolio which combines around 10 hand-picked ethical funds and crafts a portfolio for you. Remember, Interactive Investor charges a £9.99 monthly fee, so for those with portfolios under £50,000 it can be a more expensive platform. Our full Interactive Investor review can be found here.

For those looking to start, investing platforms such as Hargreaves Lansdown will let you choose your own fund and charge a percentage fee rather than a fixed monthly cost. This charging model works out cheaper for investors with under £30,000 but still gives the flexibility to choose your own stocks and funds. You can read our Hargreaves Lansdown review here.

If you’re not interested in choosing your stocks or funds and would like an easy way to start investing ethically, then the robo-advisor providers below are a good place to start. Each of the provider’s offer ethical investments and require little to no input from you. Plus, there is a little bonus when you open your account.

Ethical Investing platforms

Wealthify - Ethical Plan

Wealthify’s ethical plan aims to exclude industries and activities that are considered harmful to society and the environment, from tobacco and gambling to deforestation and unfair labour practices.

Only invests in organisations committed to making a positive impact through their environmental, social and governance (ESG) practices, so you can invest in a sustainable way.

Charge a platform fee of 0.6% and an average ethical fund fee of 0.56 p.a. This means you’ll pay 1.16% per year on your investments.

Use this link to get a £25 bonus when you open a Wealthify account and leave £250 invested for 3 months. (Offers change from time to time so please check) 

CIRCA5000 - Impact Investing made simple

CIRCA5000 is an app that lets you invest in companies making a positive impact, and offset your carbon footprint. It is impact investing, simplified.

Investment choices are focused around people, planet and CO2 offset. You can be up and running in a few minutes.

You can also connect the app to your bank account and benefit from investing round-ups.

CIRCA5000 claims to have planted 12,000+ trees and offset over two million tonnes of CO2.

Charges a £1 monthly fee plus 0.3% on balances above £3,000. You’ll also pay the fund fee which is between 0.25-0.49% p.a. depending on your choice of fund.

Use this link to get £15 free and two trees planted when you open a CIRCA5000 account. (Offers change from time to time so please check) 

PensionBee - Ethical pensions

PensionBee offers a great service to find and consolidate your old pensions into one easy to use platform. It also offers a range of ethical options including a ‘fossil-fuel-free plan’, a ‘future world plan’ and a ‘Shariah-compliant’ plan.

The attractive part of PensionBee is that it only charges one fee, making it very competitively priced against traditional platforms that carry fees for both the platform and the fund.

You can read our full PensionBee review here.

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Top-performing ethical funds

The top-performing ethical funds for the last ten years according to the Financial Times are listed below:

Ethical Fund Name 10 year total return (%)
Liontrust Sustainable Future Global Growth 267.1
Janus Henderson Global Sustainable Equity 262
BMO Responsible Global Equity 240
Pictet Water 212.4
Royal London Sustainable Leaders 195.9
BMO Sustainable Opportunities Global Equity 179.7
Premier Ethical 174.4
Liontrust Sustainable Future UK Growth 152.6
Liontrust UK Ethical 150.8
BMO Responsible UK Equity 111.2

For comparison, according to the FT, the FTSE 4Good UK index returned just 71%.

Note; the table above only includes funds that have ten years worth of data to report on. There may be other funds that have performed better over a shorter period.

Ethical Investing - can you make a difference?

Who doesn’t want their money to do good things? Plus, on top of giving you a warm fuzzy feeling, ethical investing could also generate better returns and help you build a better financial future.

As more people invest ethically, companies are being forced to respond. As such, ethical investors are being seen to hold companies to higher standards by restricting access to funds for those who don’t adhere. This is using your money for good and to make the world a better place.

Some due diligence is required to ensure your investments line up with your personal ethics. It’s best to double-check how your chosen fund manager will invest your cash to make sure their goals and yours align.

It’s also worth noting that you will most likely pay a little more for your ethical choices, only you will be able to determine if this provides you with value and comfort.

For me personally, my investments are much more heavily focused on companies that I feel are building a better future, especially since becoming a parent. My position is very much in favour of environmental factors. We only have one world and I want to make sure we don’t destroy it before it’s too late.

If you still have questions, please come join our supportive UK Personal Finance club on Facebook. You will find other like-minded individuals. It’s a safe, private community where you can ask questions and learn more about making the most of your money. Best of all, it’s free! I’d love to see you there.

Here’s to Financial Fitness does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.