Sammie Ellard-King
I’m Sammie, a money expert and business owner passionate about helping you take control of your wallet. My mission with Up the Gains is to create a safe space to help improve your finances, cut your costs and make you feel good while doing it.
Quickfire Roundup:
Simply put, ethical ISAs are savings or investment accounts that own or invest in environment-friendly activities.
This could be companies focusing on improve their ESG ratings, carbon output and investing time or money into things like green energy or solving social issues.
Their aims are to steer away from investments that could harm the planet and/or the human population.
Lots of us want our money to work for us, but have you thought about your money working for good and still make money? This is what an ethical ISA can do.
Your finances are focused on ethical investing via companies that do good in this world whilst hopefully growing to give you the return on investment you desire.
What you’re looking for is an ISA provider that offers a set of ethical principles and investment options which make them helpful for this planet.
In this article, we’ll explore what Ethical ISAs are, what they’re used for and the best way you can start saving and investing in them immediately.
Table of Contents
Podcast Episode - Dan Sherrard Smith
Join us on this podcast episode with Dan Sherrard-Smith Founder of Mother Tree.Â
Dan is on a mission to change how we bank, invest and look at the world all with a view of improving the planet.Â
We discuss ethical stocks and shares ISAs and how they need to be more accessible, what ESG mean and how companies manipulate it, plus what you can do to go green around the home.
What Is An Ethical ISA?
Knowing exactly where you are investing your money is important. When looking at ethical ISAs, you are probably wanting your cash to help sort out the issues on this planet.
Money and morals can be a minefield to navigate. However, with the introduction of ISAs in the 1990s, positive investing became possible.
Ethical ISAs really started springing up in around 2015 as more green investing ETFs and funds became more widely available (and popular).
You can look after the world whilst looking after your wallet.
You won’t pay any tax as your money grows because you’re investing it in an ISA. You’ll also be sure that your money is going towards areas of investment you are happy with.
Being invested in companies that are doing good, rather than those that have questionable activities, is undoubtedly a wonderful thing.
For me the best ethical ISA right now is with Moneyfarm they have a range of ethical ISA portfolios to choose from and you get free financial advice as part of the service.
The Different Types Of Ethical ISAs
We all have an ISA allowance of £20k each tax year. The tax year runs between April 6th and April 5th, which is why you often find people maxing out their allowance in early April.Â
There are different ethical ISAs available but it’s essential to understand that these are variants of standard ISAs on the market.Â
If available from providers, these are an option within the following types of ISA:
Ethical Cash ISAÂ
Invest your money in a cash ISA and your savings will grow at a certain percentage. Interest rates are relatively low, so you might only get 3%, so you won’t be increasing your pot of cash that quickly.Â
There are limited options for ethical cash ISAs, but if you find one, you’ll be sure that your money is being used in companies with morals, such as sustainable farming.
A good way of checking this is look where the bank invests. Mother Tree created a bank league table which shows how much certain banks are investing into fossil fuels.
Ethical Stocks & Shares ISAÂ
Your money could grow much more with a Stocks & Shares ISA, and many more ethical options are available.Â
With an Ethical Investment ISA, you money is invested in companies looking to improve the planet. Essentially it is ethically invested.
You can also still just have a non-ethical ISA but invest ethically in green funds, stocks and ETFs.
Though it’s vital to still do your research as you would with any other type of investment.
Most of the major fund providers will detail the types of businesses that they avoid and will gladly showcase the positive impact they are having on the planet.
View our list of the best ethical Stocks and Shares ISAs.
Ethical Lifetime ISA (LISA)Â
You can use a Lifetime ISA to save for your first home or for later in life. You’ll get a Government backed bonus on your deposits.Â
Your LISA can be a cash Lifetime ISA or a stocks & shares Lifetime ISA. Ethical options are available.Â
Ethical Junior ISAÂ
An ethical Junior ISA could help secure the financial future of your children. Ethical options here can help the financial future of your family’s next generation, as well as the world that they live in.Â
These are available as both Cash ISAs and Stocks & Shares ISAs.
Ethical Innovative Finance ISAÂ
You can be sure what companies your money is being invested in with ethical, Innovative Finance ISAs. You can lend and grow your money via a peer-to-peer program, ensuring companies fit your moral profile.Â
Your investment can have an on-the-ground impact on sustainable and other such green companies.Â
Where Your Ethical Investments Go & Avoid?
Ethical ISAs will avoid companies in specific sectors. This could include but isn’t limited to the following:
- GamblingÂ
- OilÂ
- AlcoholÂ
- TobaccoÂ
- WeaponsÂ
- PornographyÂ
The other side of the ethical ISA coin is investing in sectors you want your money to work in. There are many companies trying to make a positive difference in this world. These could include businesses that are:
- Against pollutionÂ
- Fighting deforestationÂ
- Pushing for equalityÂ
- Combating climate changeÂ
- Helping local communitiesÂ
- Taking steps against corruptionÂ
- Carbon output
Ethical ISA Performance & Potential
There’s a myth that ethical options don’t perform as well as traditional businesses, maybe because we’ve recently seen huge profits from oil tycoons.
However, some of the ethical options have been outperforming what we would see as traditional investments.
So you really can grow your money as you stick to your morals. Check with your provider what the ethical Stocks & Shares ISA package they have available actually includes.
It might exclude specific sectors but include others, and you need to be comfortable with where your cash is going.
Ethical stocks & shares ISAs have as much potential to grow at a decent rate as non-ethical. Perhaps more so as people turn their attention to defending this planet. A future of air quality over coal mining.
Why Opt For Ethical ISA?
This is probably the question you are asking yourself. Where do you really want your money to be used? Putting your money in the right place for you speaks volumes.Â
You can be sure that the cash you have, however much that may be, is working for you and making an impact in the way you want it to.
Should you become a member of the ever-growing group of people who are putting their money where their morals are? Or should you stick with what you know or what has been working in the past?
A range of providers offers ethical ISAs, so you need to find the right one for you. Some providers might not have a labelled ethical plan, and you might find something like being socially responsible, green, or sustainable.
As more people opt to put their money into these types of plans, we will likely see more appear. Take a look at what these ethical ISAs are with each individual provider, the past annual performances, and check the fees that are involved too.
Our favourite providers in this space are:
MoneyFarm Review
Wealthify Review
Pros and Cons Of Green Investing
Pros:
Positive Environmental Impact: Investing in green initiatives supports companies that are actively working towards a more sustainable and environmentally friendly future.
Growing Market: As global awareness of environmental issues increases, the market for green technologies and sustainable practices is expanding, potentially offering lucrative opportunities.
Risk Management: Green investments can be less vulnerable to the long-term risks associated with climate change, environmental regulations, and the declining viability of fossil fuels.
Innovation Driven: Many green investments are in cutting-edge technologies and innovations, which can lead to significant growth and development.
Government Support: Many governments offer incentives for sustainable practices and investments, potentially enhancing profitability.
Consumer Preferences: A growing number of consumers prefer to support environmentally responsible companies, driving business towards greener enterprises.
Diversification: Adding green investments to a portfolio can offer diversification benefits, as these often have different growth drivers compared to traditional investments.
Cons:
Market Volatility: The green market can be more volatile due to its reliance on government policies, technological advancements, and changing consumer trends.
Higher Costs: Some green investments, especially in emerging technologies, may have higher initial costs and longer periods before they become profitable.
Limited Track Record: Many green initiatives are relatively new and lack a long-term performance track record, making it harder to predict future success.
Complexity: Understanding the technologies and market dynamics of green investments can be challenging, requiring more research and expertise.
Greenwashing Risks: Some companies may engage in greenwashing, making misleading claims about their products or practices being environmentally friendly.
Dependency on Subsidies: Certain green industries heavily rely on government subsidies, which can be uncertain and subject to political changes.
Niche Market Risks: Some areas of green investing are niche markets and might not offer as much liquidity as more established markets.
How To Transfer To An Ethical ISA?
If you decide that an ethical ISA product is perfect for you, remember to not withdraw the money from your existing ISA.
If you do this you will eat into your annual allowance when you deposit it into the new account. Also, if you have more than £20k, you won’t be able to deposit all of it!
Instead, you can activate an ISA transfer.
That way you’ll retain this year’s allowance and your new provider will organise the transfer quickly and hassle-free. Remember this for the future too.
As more ethical ISA options appear on the market, you might find another product which is even closer aligned with your principles.
FAQs
What Is An ISA Simple Explanation?
ISA simply stands for Individual Savings Account. It is a tax-efficient way of saving money. Save up to your allowance every year and you will avoid having to pay any tax on any interest.
What Are The Disadvantages Of A Cash ISA?
The main disadvantage of a cash ISA is low-interest rates. You can usually get higher interest rates with general savings accounts. The personal savings allowance means you can get £1000 of interest on savings without paying tax. That is usually enough for most people without the tax-free benefits of a cash ISA.
What Is The Main Benefit Of An ISA?
The tax-free status of ISAs is the main benefit. Saving tax-free gives you more of your money and puts you in control of your financial future.
Conclusion
Ethical ISA products show that money does talk. People want their money to have an impact, and not just in their future lives with potential growth, but in terms of what their cash is being used for.
If you drive an electric vehicle but have a stocks & shares ISA that invests in fossil fuels, it might not sit right with you. Perhaps you tweet about equality but didn’t know your ISA product invests in companies with a poor record of worker’s rights.Â
Now is the time to look at what your money is doing in this world, as well as for your financial future. Be part of the change you want to see.
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Disclaimer: Content on this page is for informational purposes and does not constitute financial advice. Always do your own research before making a financially related decision.
