For many years, investing has followed the mantra of chasing the highest return possible regardless of all other factors.
However, a growing number of us are now demanding that monetary returns should not be the only factor determining the success of our investments.
We want to be able to put our money into companies that align with our own ethical stance and shun those that damage people and the planet.
This is the premise of 'ethical investing'.Before setting up Reco, I studied Economics & Finance and worked in the industry for a number of years.
So I thought I would put my knowledge to good use and pull together an in-depth guide to navigate the world of ethical investing.
Disclaimer: The information presented here is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation and is not intended to be relied upon by in making any investment decisions. Appropriate independent advice should be obtained before making any such decision. Also, this post contains affiliate links and we may earn a small commission if you click on them.
With that out of the way, let's get started.
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Ethical investing as we know it developed around the 1950's.
Trade unions, with vast funds under management from their members pension pots, realised they had an opportunity to affect social change with how they deployed their capital.
They used it to develop social housing and invest in medical facilities to help their members.
In the 70's, with the full scale of the oppressive apartheid regime in South Africa coming into view, fund managers started to divest from companies that operated in the country.
While not the reason apartheid ended, this type of action certainly applied significant pressure to the government.
In 1985, Friends Provident, a mutual founded by Quakers, launched the first 'ethical' investment fund - they did this by removing firms linked to alcohol, tobacco and weapons manufacture.
Since then, most major investment firms have launched some type ethical or socially responsible investment fund.
Although there is still much debate about what actually makes a fund 'ethical' as there is no set definition.
So how do we decide which companies to invest into to be ethical? There are a number of strategies that can be deployed:
Investing ethically and in a socially responsible way means not putting money into companies with the potential to do harm, be that humans, animals, or the planet.
Generally, these are the sectors that are avoided:
This is what negative screening is - removing non-ethical companies from the investment universe.
The opposite of negative screening.
Instead, you only pick investments that will have a positive impact on the planet, like those involving renewable energy or organic farming.
ESG stands for Environmental, Social and Corporate Governance and it's an evaluation of a companies overall social good.
A wide range of standardised factors and data points are distilled into a single ESG rating.
You can think of it as like a social credit score for the company. This can then be used to measure companies against one another.
For example, a chocolate manufacturer that is part of the Fairtrade scheme for sourcing its cocoa will have a higher ESG rating than those that don't.
Are you looking to get the most impact out of your investment regardless of returns?
Use the impact investment strategy. That way, your money is laser focused and only helps those companies trying to make an outright positive change to the planet.
Only investing in high scoring ESG investments is a more balanced strategy. It allows you much more freedom to invest in a wider range of sectors and industries, while making sure that checks and balancing are in place.
Negative screening is the weakest strategy. It removes unethical investments but it makes no judgement of those that remain.
A blended strategy is normally the best approach.
First, use negative screening to remove all unethical companies and sectors.
Second, rank the remaining investments by their ESG score. Or get even more granular and rank them by the specific ESG criteria that is important to you.
Finally, sprinkle in some hand picked impact investments.
This approach gives you latitude to pick from a decent sized group of companies that will hopefully have good prospects while still adhering to your ethical stance.
Before we start looking at what you can invest in, you need to understand the different ways to enter the market and what they mean for you.
You can broadly group them as:
Although you may want to combine two of these options, maybe even all three.
For example, 10 years ago I invested my own money directly into individual stocks. I had the time to do my own research and the experience to execute the trades myself.
Nowadays, I have a young son and to be honest, don't find the research as much fun anymore!
That's why I use an online automated investment management platform to invest half my money.
The other half goes into collective investments which target the key sectors I think have good growth prospects for the medium to long term.
If you are new to investing, start here.
You many be thinking, there is no way I can afford someone to mange my small investment pot!
This may have been true a decade ago but there has a been a recent wave of innovation in the investment sector.
With the rise of the internet, a number of online-only investment platforms have emerged offering portfolio investment services for a fraction of the cost of existing providers.
Many with low starting investment amounts and no fixed monthly fees.
You answer a few questions which helps to set your appetite for risk, add some seed capital and they handle the rest.
You can then track how your portfolio is performing via the web or phone app.
The best part is that a few platforms have emerged with the sole focus of ethical investing.
Clim8 only invests your money into clean industries, whether that's technology, water or energy. Plus smart mobility, sustainable food and recycling.
They map their portfolios to follow the criteria set out in the UN Paris Climate Agreement.
A team of investment professionals actively manages your investments making sure you are always invested into socially responsible companies with the best prospects.
| Service Breakdown | |
|---|---|
| Portfolio Management | Active |
| Ethical Investment Strategy | Impact Investing |
| Min Investment Amount | £25 |
| Platform Fee per annum | 0.60% |
| Investment Fee per annum | 0.50% |
| Annual Cost for a £10K portfolio | £110 |
When you initially setup your account you get to choose the type of portfolio you want. One that helps the planet, people or both.
This selection will determine the type of firms you will be invested into. You then choose your risk appetite - cautious, balanced or risky.
Unlike Clim8 there is no team of experts managing your portfolio. Circa5000 operates what is known as a 'fixed allocation' or 'passive' portfolio.
Depending on who you speak to this can be a good thing:
It's really up to you to decide what you are comfortable with.
One advantage is that a fixed allocation portfolio is normally a bit cheaper because they don't have to pay professional to actively manage the portfolio.
| Service Breakdown | |
|---|---|
| Portfolio Management | Passive |
| Ethical Investment Strategy | Impact Investing and ESG Scoring |
| Min Investment Amount | £5 |
| Platform Fee per annum | 0.50% + £1 per month |
| Investment Fee per annum | n/a |
| Annual Cost for a £10K portfolio | £62 |
There are a number of other platforms that, although not the sole focus of the business, offer an ethical investment option.
Wealthify offer a range of 5 ethical plans to invest into. Each plan contains investments from ethical funds which are all actively managed.
This means there is always someone keeping a close eye on the investments, making sure ethical standards are maintained and performance is on track.
| Service Breakdown | |
|---|---|
| Portfolio Management | Active |
| Ethical Investment Strategy | Negative Screening and ESG Scoring |
| Min Investment Amount | £500 |
| Platform Fee per annum | 0.75% |
| Investment Fee per annum | 0.36% |
| Annual Cost for a £10K portfolio | £111 |
Very similar to the Wealthify offering. Nutmegs ethical portfolios have continuous oversight from an in-house investment team.
| Service Breakdown | |
|---|---|
| Portfolio Management | Active |
| Ethical Investment Strategy | Negative Screening and ESG Scoring |
| Min Investment Amount | £1 |
| Platform Fee per annum | 0.60% |
| Investment Fee per annum | 0.70% |
| Annual Cost for a £10K portfolio | £130 |
If you already have some experience in the market you may want to try picking your own ethical collective investments. But what are they?
Like their name suggests, they are investment vehicles that take money from multiple investors which is then managed together.
They are usually defined as either:
Open ended - Every time an investor joins or leaves the fund, units are created or destroyed respectively.
Closed ended - Investment vehicles where the number of shares/units/stock don't change.
The key difference between the two types is that open ended funds will accurately reflect the value of the assets behind them.
However with close ended funds, the value of your share in comparison to the value of the assets in the fund can change dramatically.
This is because the number of shares in a close ended fund are fixed. If there is sudden investor demand for the type of asset that the fund owns, the price will go up due to limited supply.
There is much more to learn about collective investments, but if you are just looking for some ESG funds to add to your portfolio right now here's a list of the best performing from last year.
If you have lots of experience in the market or want to maximise your return and impact of your investment, individual stock investing is that way to go.
However, with higher reward come higher risk, so always tread carefully and do your research when investing into individual companies.
Like with collective investments, you will need a broker to execute your trades, plus a reliable source of information for your research.
Every listed company publishes a set of annual accounts. They contain details of key risks, statements of accounts and most importantly for us, details of their approach to ESG.
To complement this, you may want some independent verification of their ESG claims. Sites such as Sustainalytics can help with that.
For both Options 2 and 3 you will need a broker to execute trades on your behalf in the market.
Like with portfolio management, stock trading used to be something only the wealthy could afford. But with the rise of smartphone you can now invest for FREE.
There are a few caveats. The investment universe is smaller, customer service is limited (don't expect to talk to anyone on the phone) and the tools available are tiny compared to the bigger players, but for most, it will be enough.
Here's a run down of some of picks from the market.
Established in 2016, Freetrade, like its name suggests, offers a commission free trading service.
Described as stock trading for the Instagram generation, everything is managed through their phone app.
While the core offering is free, if you want access to more exotic investments or setup an ISA you will need to pay a monthly account fee.
Freetrade operates a fractional share model so that you can still invest into a company even if you can't afford one whole share. This really helps with diversification when you only have a small amount of capital to work with.
| Service Breakdown | |
|---|---|
| Trading Fees | Free (£9.99/mo upgrade available for more options) |
| GIA Account fees | Free |
| ISA Account fees | £3/mo |
| Fractional Shares? | Yes |
Originally founded in Sofia, Bulgaria in 2006, Trading 212 has since relocated to London.
Very similar to Freetrade in its offering but it has even lower fees (no charge for ISA accounts) and has a larger investment universe.
Again, like Freetrade you can hold fractional shares rather than having to buy a whole one.
| Service Breakdown | |
|---|---|
| Trading Fees | Free |
| GIA Account fees | Free |
| ISA Account fees | Free |
| Fractional Shares? | Yes |
Founded in 1995, Interactive Investor is a good middle ground player in the market.
They offer a similar range of services and investment universe to Hargreaves Lansdown but with a fixed portfolio fee.
So for those with larger portfolios their offering may be more cost effective.
| Service Breakdown | |
|---|---|
| Trading Fees | £7.99 |
| GIA Account fees | £9.99/mo (includes a free trade every month) |
| ISA Account fees | £9.99/mo (includes a free trade every month) |
| Fractional Shares? | No |
Founded in 1981 by Peter Hargreaves and Stephen Lansdown - Hargreaves Lansdown has grown to be one of the UK's biggest companies and is a constituent of the FTSE 100.
They have an extensive range of services, but you pay for it as they are one of the most expensive platforms in the market.
| Service Breakdown | |
|---|---|
| Trading Fees | £11.95 |
| GIA Account fees | 0.45%/p.a. |
| ISA Account fees | 0.45%/p.a. |
| Fractional Shares? | No |
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