Update: Since we first published this article, a number of investment platforms have stepped up and now offer ethical portfolios.
Plum, Wealthify, Wealthsimple and Tiller all offer portfolios made up of ethical funds. The first two platforms have higher fund charges, whilst the latter two have higher minimum investment requirements, but they are all making ethical investing much easier than before.
Where you put your money matters.
We’ve known this for a while of course, since students started boycotting Barclays Bank in 1969 over its support of Apartheid-era South Africa.
Many of us are concerned about climate change, gender inequality and arms manufacturing, yet invest our money – consciously or otherwise – in companies that perpetuate such problems.
Even the Bank of England is invested in oil and gas assets.
Yet it doesn’t need to be this way. Ethical investment is now worth £16 billion in the UK, according to Triodos Bank, but 67% of investors it polled had never been offered ethical and sustainable investment opportunities.
I recently decided to invest some of my money and I was determined to do so ethically, from the get-go.
I went to robo-adviser Nutmeg, low-cost platform Vanguard, ethical investment specialists Triodos Bank and investment and pensions provider Hargreaves Lansdown to learn more.
Yet investing ethically proved a lot more complicated than I had planned.
Before you read any further, please note that with ethical investing, like any type of investing, your money is at risk.
Limited help for ethical newcomers
It quickly became clear that, if you want to invest ethically, you’ll probably have to pick the funds yourself.
That’s a problem for beginners such as myself; I’d feel more comfortable using a robo-adviser (as I can’t afford a financial adviser) or a ready-made portfolio. I certainly don't have the time to research individual stocks.
Nutmeg says it’s not currently able to screen for ethical investments, although they recognise that it’s “increasingly on customers’ minds” and that they are working on it.
Less well-known robo-adviser Wealthsimple will build you a socially responsible (SRI) portfolio (more about SRI below), with three different risk appetites, but you’ll need a minimum of £5,000 to get started, which is a pretty hefty sum for most investing novices.
Triodos Bank was the only platform to offer only ethical funds, but they won’t advise you on which you should pick, instead suggesting you talk to a financial adviser.
What makes a fund ethical?
Nutmeg argues that it’s too difficult to define ethical investments and what constitutes ‘ethical’ is certainly up for debate.
There are two types of ethical investing, according to Sarah Coles, personal finance analyst at Hargreaves Lansdown.
‘Dark green’ funds deliberately invest in ethical companies and screen out unethical options, whilst ‘light green’ funds engage with company boards to encourage them to behave more responsibly.
Hargreaves Lansdown maintains a list of ethical funds on its website.
You can find SRI funds, which practice dark green investing, and are offered by all the providers listed here, apart from Nutmeg.
They are usually based on US Global Compact Principles.
Yet it’s still up to the index manager to decide what’s socially responsible and definitions can vary widely.
One recent example was Legal & General’s much-praised ‘GIRL Fund’, launched earlier this month, which invests in companies that promote gender equality.
That might be one ethical area but said fund also invests in mining giant Rio Tinto, oil company Royal Dutch Shell and bookies William Hill.
So as you can see, trying to do good with your money quickly becomes a moral minefield.
The cost of ethical investing
All investors need to think about the costs imposed by the platforms and funds themselves, which could take a big chunk out of any profit you might make.
Screening out unethical companies or engaging with others costs money and ethical funds can be quite pricey.
For example, the Kames Ethical Equity Accumulation fund, which is in Hargreaves Lansdown’s Top 150 funds, charges 0.78% of your balance per year, plus a platform fee which could be 0.45% or more.
Go through robo-adviser Wealthsimple and you’ll pay a 0.7% platform charge plus the cost of the individual funds.
One option is to look for SRI index funds, which are cheaper to run and thus supposedly cheaper for you.
You can read more about low-cost investment platforms here.
A huge business opportunity
What’s particularly frustrating about the scarcity of ethical investment platforms for beginners is that the business case for them seems so blindingly obvious.
Almost two thirds (64%) of investors want their money to support companies that make a positive contribution to society and the environment, a survey by Triodos Bank found.
Millennials like myself are even more interested in ethical investing, according to Bloomberg, giving the right platform an opportunity to get brand new customers.
The rise of Nutmeg has shown that us millennials are time-poor and want someone to do investment for us. So why won’t an ethical provider give us what we want?