What is an Ethical Fund ISA?
Ethical fund ISAs invest only in companies that are considered to meet a certain standard of social or environmental responsibility. What constitutes 'ethical' varies from investor to investor depending on their personal values - for example, some people may feel that investing in the alcohol industry is unethical, while others may not. Therefore, it's vital to discuss your priorities with your ethical fund ISA manager before investing.
Benefits of investing in ethical funds…
- By using your ISA allowance to invest in ethical funds, you can be sure that your money only goes towards causes that tie in with your personal values and morals.
- From a purely practical point of view, companies which have a good ethics track record are less likely to become embroiled in regulatory disputes, court cases and public boycotts - all of which can have a negative effect on share prices. Therefore, your investments may benefit from better long-term prospects - especially as consumers become more ethically aware.
- An ethical fund ISA allows you to diversify your investment portfolio into new, sustainable markets.
- By using your ISA allowance to invest in ethical funds, you can reap the returns tax-efficiently, with the extra reassurance that your money is being used in ways that tie in with your principles.
How do I go about investing in an ethical fund?
It can be tricky for individual investors to judge whether a particular company is operating ethically or not, so most ethical investments are made via a fund manager. An ethical fund manager will thoroughly research potential investment targets, ensuring that they meet certain criteria. Often, ethical fund managers will assess companies on both positive criteria (i.e. activities they engage in that are actively ethical) and negative criteria (i.e. activities they engage in that are actively unethical).
Positive criteria might include:
- Does the company have specific environmental protection guidelines and practices?
- Is the company taking steps to reduce its environmental impact?
- Does the company ensure the health and safety of all its workers?
- Does the company have a recycling policy?
- Does the company have measures in place to prevent child labour in its factories?
- Does the company pay its workers a fair wage?
Negative criteria might include:
- Is the company involved in the production of weapons?
- Does the company have any ties to animal testing facilities?
- Does the company have any ties with countries that have oppressive regimes or those that have a poor human rights record?
- Is the company involved in industries that might be considered harmful or damaging to those involved in them, such as gambling or pornography?
- Does the company promote harmful products (e.g. tobacco), or promote products in a socially irresponsible way (e.g. infant formula in developing nations)?
- Are the company's manufacturing processes or waste disposal methods harmful to the environment?
This website contains information only and does not constitute advice or a personal recommendation in any way whatsoever. The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. The tax efficiency of ISAs is based on current tax law and there is no guarantee that tax rules will stay the same in the future.
Different types of investment carry different levels of risk and may not be suitable for all investors. Please ensure that you read the Important Risk Information for further details. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment and should read the product literature. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.