Ethical investing explained

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Ethical investing has grown in popularity in the last few years, thanks to an increasing awareness of global challenges like climate change and inequality. In this guide to ethical investing, we’ll look at the types of ethical investment you can choose from in the UK, define ethical investing, and discuss what you should be aware of before investing your money.

So, what does ethical investing mean? If you’re looking for a clear ethical investing definition, it’s simply the practice of aligning your investments with your values. 

Investing ethically involves choosing companies or funds that align with your personal values or principles, and considers the social, environmental, or ethical impact rather than just the financial return.

Ethical investing can take a few different forms. In the UK, you could consider investing your money in the following types of ethical investment:

• Ethical savings accounts and ISAs

• Green bonds

• Sustainable funds

• Certain robo-advisers and pensions

An ethical fund might include a mix of assets, from green bonds to individual shares in sustainable companies.

The meaning of ethical investing can vary slightly from person to person, depending on individual social, moral, or religious values. For some, it might mean avoiding industries like fossil fuels or gambling; for others, it could mean actively investing in renewable energy or companies with strong human rights records.

An investment fund may choose to take the approach of exclusion or impact when it comes to the companies it invests in. With an exclusionary approach, an investment fund will actively avoid investing in industries or companies that potentially do harm. Conversely, an ethical fund may positively screen by actively including companies that create a positive real-world impact, such as those that use renewable energy, promote equality, or have high animal welfare standards.

An ethical investment strategy can be important to some as it aligns financial decisions with their ethical and moral beliefs.

On a personal level, you may simply feel that it’s important to create a positive impact in broader society or avoid contributing to companies or industries that don’t align with your personal beliefs.

For individual investors, ethical investing means putting money into companies or funds that align with common social responsibility or social goals, whether that’s climate action, human rights, animal welfare, or something else.

Ethical investors consider more than their own financial return and instead consider the social and environmental impact of their investment. This might mean avoiding sectors like gambling or fossil fuels, or investing in ethical companies that they consider to positively impact society.

Alternatively, an investor may choose a fund with active stewardship, which involves personally holding a company accountable and influencing issues via AGM voting, meeting with management, or filing shareholder resolutions.

ESG investing and ethical investing are often used interchangeably, but while they are closely related, they are not the same.

ESG investing focuses on assessing risks and opportunities related to Environmental, Social, and Governance factors. While ethical investments typically avoid specific sectors, ESG investors may still invest in these industries if they score well on ESG metrics. 

As a general rule, ethical investing is often based on personal values and is subjective, while ESG investing is more data-driven and standardised. The two approaches can overlap, but ethical investing is more about what feels right to an investor, whereas ESG is often about what works sustainably from a business perspective.

Ethical investing can influence the markets, as capital is directed to certain sectors. Investors choosing to keep their funds away from some industries may indicate that there is demand for different ways of doing business.

If there is increasing interest in financial providers or products that prioritise ethics or sustainability - for example, ethical banks - that segment could grow, prompting companies to respond by adapting their practices to meet investor expectations.

Despite its growth, ethical investing still faces some challenges, including:

Companies and funds may exaggerate their ethical credentials, making it hard for investors to know which companies are truly undertaking the work to improve their sustainability. The Financial Conduct Authority’s recent anti-greenwashing rule has now banned funds from using language like ‘sustainable’, ‘green’, or ‘responsible’ without the means to justify it.

While long-term returns on UK ethical investment funds can be as good as, or better than, traditional investment funds, this isn’t guaranteed. As with any financial product, you should ensure you do your research, and consider consulting with a financial adviser before investing money.

There’s no universal definition of ‘ethical’, and ESG scoring systems vary widely. Aligning an investment with your personal values can be difficult when ethics are largely subjective. You may want to consider checking how your fund manager selects investments — do they just follow ESG ratings, or do they actively engage with companies to improve their practices?

Traditionally, ethical funds focused solely on screening out non-ethical companies; however, investment funds and personal investors alike are now actively investing in companies they consider to make (or have the potential to make) a positive impact on the world. 

In an effort to reduce greenwashing, the Financial Conduct Authority (FCA) introduced four sustainable investment labels in 2024 to help investors recognise the different sustainability goals of investment funds. These are:

• Sustainability Focus: Invests in assets that focus on sustainability for people or the planet (for example, renewable energy sources).

• Sustainability Improvers: Invests in assets that may not be sustainable now but aim to improve their sustainability in the long term (for example, companies aiming for net zero).

• Sustainability Impact: Invests mainly in solutions to sustainability problems, in order to achieve a positive impact for people or the planet.

• Sustainability Mixed Goals: Invests mainly in a mix of assets that either focus on sustainability, improving their sustainability over time, or achieving a positive impact for people or the planet.

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