The rise of the ethical ISA: what’s all the fuss about?
July 23, 2019 - 2 minutes read
Posted by Claire Parker
Mahatma Gandhi famously said that, “the future depends on what you do today.”
This quote captures the new approach to investing with the rise of the ethical ISA. Investors and savers want to invest in a way that will make their grandchildren proud by turning to the various ethical ISAs offered by forward thinking financial entities.
According to the Investment Association, sales of ethically focused funds rose from £371 million to £1.3 billion in just three years (2015-2018), while the total fund sales to retail investors fell from £23 billion to minus £5.5 billion due to more investments being sold than purchased.
Ethical ISAs are plans where money is allocated to shares, funds, bonds and cash deposits that go towards companies or projects that make a positive impact on society. Those fixing their gaze on these socially responsible options for their £20,000 ISA allowance this tax year are joining a small group that are burgenoning more rapidly than the market as a whole.
In the early days, ethical funds simply avoided more ‘amoral’ shares, such as firearms, alcohol and tobacco. The more modern approach is to invest in companies that make their money doing something progressive or positive. Examples include investing in fair trade companies or investing in companies developing renewable energy.
But the question is, will you still profit?
A study conducted by fund analysis firm 3D Investing found that investors will not be sacrificing profit for positivity. The study suggested that nearly 4 out of 5 of the 300 funds that it judged to be ethical outperformed their sectors from 2015-2018.
It’s often assumed that ethical investment attract mainly altruistic young people. However, a recent survey conducted by the investment trust Impax Environmental Markets suggests that the most ardent age group for ethical investment is the over-55s, who are more likely to back a company that makes a beneficial impact.
So, where do you start with ethical investing?
There are two main types of ethical investing strategy: ESG (environmental, social and governmental) and SRI (socially responsible investing).
With ESG, the environmental, social and governance practices of an investment that may have a material impact on the fund are taken into account. While there may be a focus on social consciousness, financial performance remains the primary influence.
SRI takes things a step further. Investments are eliminated or selected according to specific ethical criteria. For example, an investor may choose to avoid a mutual fund that invests in gambling companies because they hold beliefs against gambling.
Investing in funds that target your own ethical criteria isn’t easy. Ethical funds don’t share the same definition of ethical, so it might be worth seeking financial advice to make sure your hard earned investments do change the world in the way you want.