Do you buy free-range eggs and organic meat, but never question whether your pension is funding factory farming? If so, it might be time to think about whether your money choices should be as ethical as your shopping basket.
New research from Triodos shows that the Covid-19 pandemic has made us more conscious of wanting to invest ethically, not less.
The bank says awareness impact investing is higher than ever, with more than a fifth of investors saying Covid-19 is motivating them to explore investing in sustainable funds.
Nearly four in ten (39 per cent) Brits think ethical investments are the key to addressing the climate issues to avoid future pandemics.
‘It’s clear that many people want a green and fair recovery and are prepared to invest in making it a reality,’ says Gareth Griffiths, Triodos’s head of retail banking.
‘We hope that as society recovers, more people choose to support companies that are prioritising the environment and behaving responsibly to help create a better future for all.’
Whether you are just starting out in investment, or already have stocks and shares Isas, pensions or other investments, ensuring your nest egg is sustainable can be daunting.
So many different types of investments are called ‘green’, ‘ethical’ or ‘sustainable’, and there’s currently no one standard they all adhere to.
Amy Clarke, chief impact officer at Tribe, Britain’s first wealth manager aimed entirely at impact investing, acknowledges it is difficult to find your way through all the labels on so-called green funds.
‘It is an alphabet soup out there, and that makes it difficult for people to invest in the values and the things they care about,’ she says. However, she says investing in companies that are able to generate returns without harming the planet ‘is just good investment sense’.
How to invest ethically
If you are looking to invest ethically, there are a huge variety of different types of product to help you. A good place to start is with your ‘tax wrapper’ – either a pension or an Isa, depending on when you might want to use the funds you are putting away.
A stocks and shares Isa allows you to put up to £20,000 a year into investments without paying capital gains tax if they rise in value, while if you invest in a pension there are significant tax breaks available.
The 20 per cent you pay in basic rate tax on your income is usually added back into your pension pot as you invest, while you can also claim any higher or additional rate tax on that money through your tax return. Most people can pay £40,000 a year into their pension and get this tax relief.
Many of us have a pension through work, and it is often possible to switch your employer pension to a greener fund.
For example, Nest, which was set up by the Government (nestpensions.org.uk) to support the requirement for employers to automatically enrol new joiners into pensions, has an ethical fund with the same charges as its other funds, 0.3 per cent.
The most recent factsheet for the Nest funds showed that the ethical fund has outperformed all but the pension group’s Sharia fund in the five years to June 2020, including its high-risk fund, which is supposed to provide the highest growth.
Making an ethical choice
Those with an employer pension may have few ethical fund choices, but for those of us with a DIY pension such as a Sipp (Self Invested Personal Pension) or Isa, there are many more ethical funds to choose from.
These funds are typically run by an expert fund manager, who will choose investments using a range of criteria, although some might track an index of so-called ethical stocks, such as the FTSE4Good indices.
As mentioned above, there’s no one criterion that makes a fund ethical, although the EU is working on some common guidelines that may be adopted elsewhere in future.
Sometimes you will see funds described as ‘light green’ or ‘dark green’, depending on whether they screen out companies with certain characteristics – such as tobacco or gaming – from their portfolios, or actively choose companies with a good record for sustainability.
If you are confused about how ethical the funds you are looking at are, Interactive Investor (ii.co.uk), is an investment website that allows you to pick your own funds and has a selection of rated ethical funds called the ACE 30.
ACE stands for ‘Avoids, Considers, Embraces’, which describes whether the fund avoids harm, considers environmental and social issues or actively invests in ‘positive impact’ solutions to the world’s problems.
Dzmitry Lipski, head of funds research at Interactive Investor, says, despite a volatile year for equities, the ACE funds ‘shown great resilience’.
‘This is most likely because these funds have little or no exposure to sectors such as oil and hospitality and leisure, which have tanked during the pandemic,’ he says.
The top performer for the ACE 30 over the past year is a fund called iShares Global Clean Energy UCITS ETF which is up nearly 63 per cent since last month.
The fund tracks an index of clean energy stocks across the globe. Ethical funds in the UK have grown less well, as the UK stock market has struggled with economic uncertainties surrounding Brexit on top of the pandemic.
Adrian Lowcock, head of personal investing at investment platform Willis Owen, recommends several ethical funds for beginners, including Kames Ethical Cautious Managed Fund, which applies a strict ethical filter to its investment process, excluding mining and energy stocks, tobacco, and banks with investment banking operations.
He also likes ASI UK Ethical Equity which he says follows a ‘strict ethical process’, excluding companies that cause environmental damage, animal testing, genetic engineering, intensive farming, alcohol, pornography, gambling, tobacco and weapons.
It actively chooses companies with environmental technology, companies that promote equal opportunities, that donate to charities or are strongly involved in the community, and companies with good principles of business behaviour and ethics.
As well as buying ethical funds through a standard fund provider, there are some specialist companies where you can invest directly.
Triodos Bank offers three types of ethical Isa – a cash one, which has a rate of only 0.45 per cent APR, and two investment Isas.
The first is a stocks and shares Isa that invests in a portfolio of ethical stocks, while the second is an innovative dinance Isa, which allows you to invest directly into early stage ethical companies.
Innovative finance Isas (IFISAs) mean that you take on more risk, as early-stage companies are more likely to fold, so you might not get your money back.
Essentially, they are a form of crowdfunding.
Triodos’ IFISA investments include a YMCA in Newark-upon-Trent, that wants to raise money to build a new community centre and is offering a six per cent bond.
Previous offers included a four per cent bond from the bank, and a five per cent bond aimed at raising money for a sustainable supermarket in Worthing, West Sussex.
You could also invest through Abundance (abundanceinvestment.com), which offers the chance for investors to put their money into their local councils to develop green initiatives.
The first ever council green bond – for West Berkshire – raised £1m this month, which will be used to fund projects with the local Wildlife Trust to protect and enhance the natural environment, to update traffic signals to LED, and to build cycleways to promote sustainable transport. In turn it pays investors 1.2 per cent.
It is worth noting these bonds usually require you to tie up your money for a certain period, though they can be bought and sold. The West Berkshire bond lasts for five years.
While this bond is now closed, there are others in the pipeline in Warrington and Leeds. Bruce Davis, co-founder and managing director of Abundance Investment, says: ’We’re excited that the UK’s first Community Municipal Investment has had such a positive response and fully expect these will become as well known and integral to people’s investment portfolios as National Savings and Investments is now.’
‘Our bonds offer investors the ability to invest for a low risk and receive a fixed return while knowing their money is working to accelerate the UK’s progress to Net Zero.’
Will I make money?
Of course there is always a risk with investments, whether bonds or shares, that you may not get back what you invested and it is wise to only invest money you know you won’t need immediately.
However, recent figures from Willis Owen, an investment platform, indicate that over the last ten years, ethical indices have outperformed their non-ethical peers in the UK and US over one, three, five and ten years.
The FTSE4Good UK Index, an index of UK companies with strong Environmental Social and Governance (ESG) ratings, has risen 125 per cent over ten years, compared with the FTSE All Share index at 118 per cent. The FTSE4Good US Index has risen 373 per cent over a decade, compared with the benchmark Standard & Poor 500 at 321 per cent.
Adrian Lowcock, at Willis Owen, says that this is partly to do with falls in the oil price, mining and tobacco sectors. ‘Many ethical funds have no exposure to these areas and therefore have protected investors.’
There is growing evidence that companies with strong ESG principles in all areas do better than their counterparts.
‘Companies that behave responsibly and incorporate environmental, social and governance principles into their businesses are better custodians of capital, and in turn provide better long-term returns for investors,’ he says.
Good for your finances and good for our battered planet, too.
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