Investing for good is an increasingly popular strategy among Isa holders who want their savings to support important causes, as well as to generate strong returns.
Investors are ploughing money into funds which target businesses that uphold environmental, social and governance (ESG) standards.
Such funds, sometimes referred to as responsible or sustainable, posted positive years for fund sales while most other sectors saw more money out than in, according to the Investment Association.
In 2022 investors piled £5.4bn into these investments.
The idea is that firms making efforts to preserve the environment, treat staff well, and have strong governance in place will do better financially in the long-term, benefiting investors.
“Sustainable investing has become increasingly high on many investors’ agenda,” says Dzmitry Lipski, head of funds research at investment platform Interactive Investor.
“The urgency of the climate emergency has contributed to this, as well as the growing amount of evidence that shows companies which adhere more closely to ESG considerations can produce better long-term returns.”
ESG investing covers standards across a broad spectrum. Those in the environmental bracket would be a company’s approach to climate change, nuclear energy, becoming carbon neutral and toxic waste.
Social investment supports the core elements of a modern society. Issues include treatment of staff and suppliers, and to what extent a company upholds labour and human rights.
Governance refers to the leadership of the business, diversity in the boardroom, matters of executive pay and company stance on shareholder rights.
Rather than trying to work out which companies have the highest ESG standards, you might find it easier to let the professionals to do the leg work and invest in funds.
There are broad funds which find a wide range of companies that align with ESG principles.
You can also find more specialist funds targeting one area. For example, Ninety One Global Environment which only invests in companies that contribute to lowering carbon emissions.
You can also use an Exchange Traded Fund (ETF) which isn’t run by a manager, but is controlled by a computer which selects stocks according to their connection to a theme such as clean water, healthcare that helps prolong life or gender equality.
There are a number of bond funds too which often offer lower interest rates and less volatility than traditional fixed income funds.
Choosing your investments
Your platform might have a dedicated list to responsible investing. Interactive Investor, has the “ACE 40” – a list of funds, ETFs and investment trusts which are managed in a “genuinely sustainable way”.
Fidelity has a tool – the Sustainable Investment Finder – which allows investors to filter an entire catalogue of sustainable investments by seven categories.
It will allow investors to either include, exclude, or avoid issues, industries, and areas of interest. For example, you can filter for funds that include a climate change/greenhouse gas emissions policy. You can also look at funds that avoid coal, oil or gas companies.
Roboadvisers Nutmeg offers ready-made responsible portfolios. At Nutmeg there’s an ESG score for each portfolio from 0 to 10, where a higher score signifies better adherence to responsible measures.
Wealthify’s ethical investment plan backs firms that make a positive impact via ESG practices.
Good With Money likes The Big Exchange, Simply EQ’s Positive Impact Portfolios, Wealthify’s Ethical Plans and Moneybox’s Socially Responsible options.
Lisa Stanley, co-founder of Good With Money, says: “Be prepared to invest a little time to ensure you choose an Isa provider that suits your needs. That largely depends on whether you want to select your own funds or prefer an off-the-shelf option.”
When it comes to the investments, experts highlight that ESG investing is highly personal.
Tom Stevenson, investment director for personal investing at Fidelity International, says: “ESG investing is subjective, and ultimately, your investment decisions will come down to your personal values.
“Ask yourself: what are your personal values, which sectors and companies are you happy to invest in, and which do you want to avoid? Determine whether you want to invest in sustainability-focused funds, funds focused on ethical issues, or socially focused funds with an emphasis on people issues. Doing this will help you confidently choose investments in line with your principles.”
‘I hope my money can go towards doing some good’
James Hughes, 38, from Cheshire is passionate about helping to tackle climate change and uses his Isa to invest sustainably to add to his efforts.
James, who works for a university running financial projects, has been saving hard to build up a healthy Isa fund for his future – and hopefully an early retirement.
“It makes sense to invest in companies making a positive contribution to the planet and society. I’m really interested in firms who want to make a difference and of course who can provide a decent financial return at the same time.”
James has selected a few ESG funds for his Isa. He holds Foresight Solar, which invests in solar panels and battery storage assets, primarily in the UK but also in Spain and Australia.
He also holds JLEN Environmental Assets Group, another solar firm which focuses on UK assets but is more diversified, with the projects it invests in spanning a range of sectors including wind, solar and waste management. James also invests in Greencoat UK Wind, which invests in UK wind farms.
As well as funds, James holds direct stocks. “I automatically rule out the oil and gas sector because of environmental concerns,” he said. “I hope my money can go towards doing some good – and to get me to a place where I can retire at 60.”
Ready to invest?
Laith Khalaf, head of investment analysis at AJ Bell, tips the iShares MSCI World SRI ETF – as a good starter fund for green Isa investors at low cost- just 0.2 per cent a year. The fund has returned 76 per cent in five years, turning a £10,000 investment into £17,600 over that time.
He also likes Liontrust Sustainable Future Global Growth which invests in global companies driving sustainable growth. The fund has returned 73 per cent in five years, turning a £10,000 investment into £17,300.
For those who want exposure to the UK stock market Khalaf likes Royal London Sustainable Leaders, investing in around 50 companies that demonstrate a measurable benefit to society. The fund has returned 57 per cent in five years, turning a £10,000 investment into £15,700.
Lipski suggests the CT Sustainable Universal MAP range as a “one-stop global investing shop” that incorporates actively managed multi-asset and sustainable investing with a focus on low cost. There are three to choose from according to risk – cautious, balanced and growth.
The CT Sustainable Universal MAP Growth fundhas returned 12 per cent in five years, turning a £10,000 investment into £11,200.
He also likes Montanaro Better World which invests in small and mid-size companies, which aim to help solve some of the world’s major ESG-related challenges. The fund has returned 16 per cent over three years, turning a £10,000 investment into £11,700.
When choosing funds, watch out for those claiming to invest sustainably. The growth in the market has led to widespread accusations of greenwashing, where fund groups have added the word “sustainable” or “responsible” to a fund’s name to increase its marketing appeal.
To find out if a fund is truly responsible, have a look at the fund factsheet which holds information on some of the companies it invests in, its objectives and how the fund is run. You could delve deeper and find out on the company website if they regularly vote on corporate issues that matter to you, and challenge companies on tricky issues.
Lisa Stanley adds: “The Financial Conduct Authority has also recognised the issue of greenwashing, and has begun a consultation process around new, stricter labels for so-called sustainable investment funds. The proposals are designed to answer people’s desire to understand the positive environmental impacts of the financial products they choose.
“Until then it’s important to do your own detective work.”