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 are now around $5trn in assets under management in sustainable funds globally. 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
Moneyfarm Ethical ISA - Special offer - Pay no fees for the first year
Moneyfarm* has a number of socially responsible investing (SRI) portfolios that are optimised for factors like environmental risk, CO2 intensity, the avoidance of controversies and many other similar metrics. The 7 portfolios prioritise environmental, social and corporate governance factors, often referred to as ESG. The portfolios are built in the same way as the regular portfolios with Moneyfarm selecting the best-in-class ETFs and there is an additional layer of negative screening, ensuring that companies involved in arms production and burning of fossil fuels are automatically excluded.
The annual management fees for the Moneyfarm ethical portfolios start at 0.75% if investing under £10,000. The fee is tiered meaning that the fee you pay reduces and is applied to your whole portfolio as you invest more. So, portfolio fees are reduced to 0.70% once you have invested between £10,001 and £20,000, 0.65% once you invest between £20,001 and £50,000, 0.60% when investing between £50,001 and £100,000, 0.45% for investing between £100,001 and £250,000, 0.40% for a portfolio worth between £250,001 and £500,000 and you'll only pay 0.35% once you have over £500,000 invested. Ongoing fund costs are very cheap and average around 0.21%.
Money to the Masses readers can take advantage of an exclusive Moneyfarm offer. Simply click on the link below and open a general investment account or Stocks and Shares ISA with a minimum of £500 and Moneyfarm will run your money fee-free for a year.
Wealthify Ethical ISA - Low management fees
Wealthify offers five ethical portfolios that invest in organisations that are committed to having a positive impact on society and the environment. Ranging from 'cautious' to 'adventurous', the five risk-based plans receive rigorous ongoing screening, ensuring that ethical standards are maintained. All fund providers are signatories of the Principles of Responsible Investing (PRI), a United Nations-supported network of investors that work together to promote responsible investing.
Wealthify charges a low management fee of just 0.60%, which is the lowest of all the robo-advisors if investing less than £50,000. In addition, investors have to pay fund charges that average around 0.70%.
Nutmeg Ethical ISA - 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 0.22% 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 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.
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.
The tools provided are good quality and the site as a whole is easy to navigate. Interactive Investor charges a flat-fee structure with its lowest plan priced at just £4.99 per month if investing less than £50,000. Those investing more than £50,000 will be moved up to the £9.99 per month subscription, however, that does include a free trade each month, a saving of £3.99.
Read more about Interactive Investor in our review 'Interactive Investor - is it the best broker for your money in 2023?'.
Bestinvest - Good for those wanting flexibility
Bestinvest* is part of Evelyn Partners (formerly known as Tilney Smith & Williamson) and it offers a broad range of financial planning, investment planning and investment advice services. It is one of only a few providers that offer a 'Flexible ISA', letting you withdraw money from your ISA temporarily and then pay it back within the same tax year. Crucially, this doesn't affect your annual ISA allowance. Additionally, Bestinvest pays a generous 4.45% interest on uninvested cash, the highest of any provider in the UK.
In terms of its ethical offering, Bestinvest has an investment search tool which allows investors to easily navigate and filter sustainable options. It also offers two sustainable portfolios including a 'Cautious' and 'Adventurous' option.
Read more about Bestinvest in our review 'Bestinvest review - Is it the best SIPP & ISA provider?'
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 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.
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 0.5% to 1.8% per year. Overall, it is difficult to judge The Big Exchange as it is fairly 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.
For more detailed analysis, read 'The Big Exchange review - is it the best ethical investment platform?'
Triodos
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 Triodos Sterling Bond Impact fund.
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. 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.
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 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, the number of options is likely to increase further and the sector as a whole become more sophisticated. Ethical investments have a decent track record when compared to the broader market, meaning ethical investors do not necessarily need to compromise performance for their principles. However, it is worth noting that volatility had a significant impact on the performance of many ethical funds in 2022, much of this being put down to ethical funds often favouring technology stocks, thanks to their lower carbon footprints.
We provide some more insight into the performance of both standard and ethical investment portfolios in our article 'Which is the best performing stocks and shares ISA?'.
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