In this article we highlight the best ethical Stocks and Shares ISAs from investment platforms and specialist ethical providers, taking into consideration costs, performance, range of investments and usability. We will also outline what you should be looking for from an ethical ISA provider and how to choose the best one for you.
The growing demand for Ethical investment ISAs
One of the biggest trends we have seen in investments over recent years has been the move to ethical investing. Morningstar states there is now over $1trn in assets under management in environmental, social and governance (ESG) funds globally, with almost a third of European fund sales falling into this category. This means there is also a growing demand for ethical ISAs among UK investors, who are keen to combine the tax-saving efficiency of the ISA wrapper with the potential to invest in line with their principles.
The growth in ethical ISAs has been two-pronged: we have witnessed a number of ethical banks and ethical investment companies springing up to meet demand, as well as more traditional investment platforms adding an ethical dimension to their existing proposition. The result is a great deal of choice for consumers, whether they are looking for ESG, socially responsible investing (SRI), impact investing or sustainable investing options.
Best ethical ISAs from general investment platforms
Nutmeg - Good for managed portfolios with a track record
Nutmeg stands out in the ethical ISA sphere because of the fact it gives all of its portfolios - even those that are not specifically "SRI" - a score out of 10 for their ethical credentials. This is judged against 15 criteria across the environmental, social and governance categories and makes it exceptionally easy for investors to get an understanding of the nature of the investment. Over and above that, its 10 specific SRI portfolios, which range in risk from low to high, are focused on avoiding companies engaged in "controversial activities" and towards those that rank highly against the ESG criteria.
The annual fees for the SRI portfolios stand at 0.75% for investment pots up to £100,000 and 0.35% for those over £100,000, which is the same cost as for its standard fully managed portfolios. Investors will also have to pay the underlying fund charges, which average around 0.31%, compared with 0.19% for Nutmeg's fully managed portfolios. It is worth noting that you can enjoy a year of not having to pay any platform fees for the first 12 months through our exclusive offer. You can find details of the offer as well as a full review of the Nutmeg proposition, including analysis of its investment performance, in our article "Nutmeg review - are they the best investment for you?"
Compared with some other robo-advisors, Nutmeg has a much longer track record as it launched in 2012. Over that time its portfolios at the riskier end of the spectrum have tended to perform better against its rivals, even within its newer SRI portfolios.
Wealthsimple - Good balance of costs and performance
Wealthsimple* is one of the few other robo-advisor services that offers a comprehensive SRI proposition alongside its "non-ethical" ISA choices. By answering a few questions online, customers are guided into one of nine SRI portfolios, with a choice of three within each risk category, which are called conservative, balanced and growth. These portfolios are populated with ETFs and low-cost mutual funds, with a good level of diversification across asset classes, geography and sectors.
It stands out for two reasons: it's relatively low cost and its performance. For the latter, a good example is its medium-risk SRI portfolio, which returned 5.5% over the 12 months to September 2020. This compares with a return of 5.15% for competitor Wealthify's confident SRI portfolio and 4.62% for Nutmeg's portfolio 5 over the same period.
In terms of cost, Wealthsimple charges 0.7% per annum for portfolio's up to £100k. For larger portfolios it charges 0.5% per year and investors are transferred to the "black package", which includes an investment planning service and access to airport lounges, among other perks. As the portfolios are mainly invested in passive and low-cost funds, the associated fund fees are also low at around 0.20% per year.
When looking at the ethical credentials of its underlying investments, Wealthsimple claims it removes "problematic"industries from the indices it uses, as well as taking out the top 25% of carbon-emitters in each industry to reduce the overall carbon footprint. It also seeks out companies that have 25%, or at least 3, women on their board of directors.
For more information on Wealthsimple, check out our review "Wealthsimple review - Is it the best choice for investors in the UK?"
Interactive Investor - Best for those who want to choose their own investments
Interactive Investor* differs from the robo-advice platforms by offering an environment where DIY investors are provided with the tools they need to build and manage their own investment portfolios. The Interactive Investor ethical proposition is based on its "ACE" investment philosophy, which involves:
- Avoiding certain companies, sectors or business practices, such as tobacco
- Considering strict ESG criteria
- Embracing companies that deliver positive social or environmental outcomes
This is interwoven into its ethical ISA offering, which comprises of a ready-made growth portfolio, an ethical investment long list of funds for investors to choose from, as well as an "Ace 40" list of the investments Interactive Investor deems to be the best-in-class in the ethical space. If you want to invest ethically and choose your own investments then Interactive Investor is leading the way in the investment platform space.
While the tools provided are good quality and the site as a whole is easy to navigate, one sticking point for some will be the cost, with a flat-fee starting at £9.99 per month, with a standard dealing charge of £7.99 once you have used up the one permitted trade that is allowed on your chosen monthly plan. This really only becomes cost-effective for investors with more than £50k in the pot. If you have less than £50,000 in your portfolio there is nothing to stop you using their research and using an alternative platform such as Hargreaves Lansdown* to manage your investments.
Read more about Interactive Investor in our review "Interactive Investor - is it the best broker for your money in 2021?"
Best ethical ISA from specialist ethical providers
The Big Exchange
Originating from the Big Issue Group, The Big Exchange launched in October 2020 as an investment platform with the worthy aims of "transforming financial services and building a fairer financial system for everyone". For its investment option this means implementing a bespoke fund screening process based specifically on the United Nations' Sustainable Development Goals. This filters through to three risk-rated portfolios - named "bundles" by The Big Exchange.
A criticism often levelled at ethical portfolios is they often opt for passive vehicles as a way to keep costs down, but this can reduce the manager's ability to keep to their ethical mandate. The Big Exchange, however, has deliberately chosen actively managed funds, with the rationale that this facilitates more mindful stock selection in line with ethical principles rather than just screening out the worst offenders in any given sector. So far it has 36 funds from 10 investment houses in its portfolios.
In terms of fees, it charges a platform fee of 0.25%, which is relatively competitive. The underlying fund costs are obviously higher than with portfolios based around passive vehicles and typically range from 0.8% to 1.8% per year. Overall, it is difficult to judge The Big Exchange as it is so new-to-market but, on first inspection, it seems a viable proposition and should be attractive to those with more finely tuned ethical requirements from their investments.
Triodos is an ethical bank that offers a cash ISA, junior ISA and Stocks and Shares ISA. Unlike the other ISAs in this review, Triodos offers direct investments into its own actively managed funds rather than a portfolio of funds. At the time of writing, the available options are the large-cap focused Triodos Global Equities Impact fund, the small-and-mid cap orientated Triodos Pioneer Impact fund and the soon-to-be-launched Triodos Sterling Bond Impact fund.
To date, the Triodos Global Equities Impact fund has underperformed its MSCI World Index benchmark in five of the past six years, up to and including 2019, although it aims to produce steady long-term growth through exposure to stocks that meet its sustainability criteria rather than outperforming its benchmark. Indeed, it tends to deviate from the benchmark, while maintaining its bias to large-cap stocks. The Triodos Pioneer Impact fund, meanwhile, is suited to investors with a greater appetite for risk as it is a more concentrated portfolio predominantly invested in small and mid-cap opportunities. Again, it doesn't target outperformance of its MSCI World Small and Mid Cap index benchmark, although it turned in a strong performance in 2019, having lagged for the previous three years.
In a similar way to The Big Exchange proposition, Triodos is a good option for those looking for actively managed, ethically driven investments rather than a cover-all passive alternative. The costs are in line with what you would expect to pay to invest in a single fund investment, with ongoing charges of around 0.75%, 1.00% and 1.10% for the Sterling Bond, Pioneer Impact and Global Equities Impact funds, respectively. Overall, it's a bolder choice than those offered by the platforms as it is centred on single funds, meaning it is probably better suited to investors with some prior experience of the markets.
tickr is a user-friendly app that specifically targets millennials who are keen to partake in impact investing. It offers three risk levels - cautious, balanced and adventurous - with the option to tap into three main themes: climate change, equality and disruptive technology, or a combination of all three. It's easy to set up and manage your account from your mobile, although, as it was only launched in January 2019, it doesn't yet have an extensive track record. You can even invest spare change (via round-ups) from everyday purchases made using your existing current account.
Like many ethical products, it is centred on index trackers, which keeps the underlying fund costs down to between 0.3-0.61%, depending on which of the themes you opt for. However, the flat monthly fee of £1 means returns for smaller investments can be easily eroded by the costs, with a minimum investment of around £150 per month necessary to counterbalance this.
Overall, it's an interesting proposition and one that is sure to appeal to young people and those dipping their toes into ethical investing for the first time. A criticism is that it lacks some of the tools and functionality of other investment platforms which, combined with the fee structure, might mean that investors choose to transfer out once they gain confidence in their capacity to have more input into their investment choices.
This is discussed further in our review "tickr review - Is this the best app for easy impact investing?"
How to choose the best ethical ISA for you
As the number of ethical ISAs available continues to skyrocket, it pays to carefully consider what it is you are looking for from this investment vehicle. While they will all share the tax-efficiency of all ISAs, allowing you to pay in up to £20,000 per year tax free, they each offer slightly different features, particularly in terms of how they service the "ethical" part of the equation.
When you are considering the options available, ask yourself:
- What are your priorities with ethical investing? Are you looking for an investment that addresses a particular issue - for example, climate change - or are you happy to simply screen out some of the more controversial stocks that are having an actively detrimental impact? Look at the individual providers' investment philosophy and how they implement them in the choices they make and the strategies they employ.
- How important is cost? Would you rather use low-cost passive funds or would you rather pay extra for actively managed funds that perhaps apply greater scrutiny to the ethical credentials of the underlying holdings? Are you willing to take on extra risk in order to secure a higher return or tap into a particular theme that fits more closely with your principles?
- What is the track record of the provider and the funds they invest in/manage? There is a great deal of innovation in this space but in some cases the strategies are untested and unproven.
- How much choice do you need and how confident are you in making investment decisions? This will help determine whether a ready-made portfolio is suitable or if a platform that allows more autonomy in investment choice is better.
Summary - should you get an ethical ISA?
The ethical investment trend is here to stay and, indeed, looks set to grow further. There are a great many ethical ISA choices available - as demonstrated above - and there should be something to suit most people. As ethical investing moves more firmly into the mainstream, with investors realising they don't necessarily have to compromise performance for their principles, the number of options is likely to increase further and the sector as a whole become more sophisticated.
If a link has an * beside it this means that it is an affiliated link. If you go via the link Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. But as you can clearly see this has in no way influenced the independent and balanced reviews of the products. The following links can be used if you do not wish to help Money to the Masses or take advantage of an stated offers - Interactive Investor, Hargreaves Lansdown, Wealthsimple
Looking for a financial adviser near you?
Do you need financial advice? An independent financial adviser can show you how to make the most
of your money. Find your nearest qualified and regulated adviser using this VouchedFor search tool.