Skip to main content
  • Register
  • Help
  • Contact us
  • Log out of your HL account
Top
Guide to sustainable SRI investingf

Guide to ethical and sustainable investing

Put your principles into practice

Important Information: Investments can go down as well as up in value, so you could get back less than you put in. The information on this page isn't advice - please ask us for advice if you’re not sure which investments are right for you. Past performance is not a guide to the future.

Making an impact with your investments

The case for investing is simple. To grow your money over time.

But investing can be about so much more than just trying to make money. You can use your investments to benefit society, as well as yourself. And there are lots of ways to go about it.

Sustainable or ethical investing means different things to different people. In this guide, we break down the jargon and look at some of the main ways you can align your moral views with your investments.

What is investing ethically?

This guide will help you to...

  • Understand what it means
  • Find out about the different types of ethical investments
  • Decide whether an investment option is right for you
  • Learn how to get started putting your principles into practice

1. What is investing ethically?

Let's start with the basics

2. Ethical funds

Investing with exclusions

3. Sustainable and impact funds

A focus on positive effects

4. ESG integrated funds

A less restrictive approach


Number icon 1

1. What is ethical and sustainable investing?

What is ethical and sustainable investing?

It means different things to different people.

What is ethical investing

You could avoid investing in companies that do harm, like tobacco producers or alcoholic drink makers. We call this negative screening. Or you could invest in companies that contribute to society regardless of which industry they're in – from businesses treating their employees well, to those creating clean energy through wind farms or solar panels. That's called positive screening.

If you don't have the time or knowledge to research individual companies and apply these techniques yourself, you could invest in funds that are managed in a way that fits your views.

Funds can be a great way to invest in lots of businesses of different sizes, in different industries across the globe. One of the big benefits of investing in funds is that the managers can talk to companies they invest in to encourage them to become more sustainable or socially responsible.

There are more options than ever for investors who want to help make the world a better place. This guide covers the main things you need to know.

Important information

All investments fall as well as rise in value, so you could get back less than you invest. If you are unsure of the suitability of an investment for your circumstances, please seek advice. Past performance is not a guide to the future.
Have a question?

0117 900 9000

View opening times

Email us

Help & support


Number icon 2

2. Ethical funds

Ethical funds

Avoid investing in areas that don't line up with principles.

Ethical funds

Ethical funds won’t invest in companies or industries that don’t meet their moral criteria. Companies that damage the environment, like those in the mining and oil & gas industries, are often excluded, as are weapons manufacturers, and tobacco companies.

The exact restrictions will vary from fund to fund, so it’s important to check the details. We look at the ethical criteria of a selection of funds in our ethical sector review. But you’ll find a more detailed description of each fund’s criteria in its prospectus.

How do we expect them to perform?

Ethical funds have the potential to perform well over the long term but their performance will differ to that of more conventional funds. If areas that ethical funds can’t invest in are performing well, ethical funds could underperform compared to unrestricted funds. But ethical funds could do well if these areas suffer a setback.

Lots of the areas where ethical funds can’t invest, like tobacco and some healthcare businesses, tend to be the ones that make money whatever shape the economy is in. Ethical funds have to invest more in cyclical businesses, like those in the technology or financial sectors, whose share performance tends to mirror the health of the economy. Profits and dividends rise during the good times, but suffer during slumps.

Ethical funds also tend to invest more in small and medium-sized businesses than other funds. That’s because lots of large businesses operate in areas ethical funds can’t invest in, like oil and gas. Smaller companies have excellent long-term growth potential but they can be more volatile than larger ones, which makes them higher-risk.

Who might be interested in ethical funds?

  • Those who want to avoid certain industries
  • Those prepared to accept that ethical funds will perform differently to unconstrained funds

Number icon 3

3. Sustainable and impact funds

Sustainable and impact funds

Making a difference with your money.

Investment portfolio banner

Sustainable funds try to make money by investing in companies that have a positive effect on the world. No area is specifically off limits. Instead, the manager will look for companies acting responsibly.

There are different ways a fund manager will define sustainable. Some look at how responsible a company is – they might look at whether its products can be recycled or if it engages with the local community and social projects. And some managers only invest in companies that are actively trying to improve our future world, like green technology developers or clean energy providers.

Impact funds go a step further. They try to generate a social or environmental benefit that can be measured. They might invest in companies that save a quantifiable amount of water, or avoid producing a certain amount of carbon dioxide. That means they’re more restricted on where they can invest than sustainable funds, but each investment has a direct, measurable impact on society.

For example WHEB is a fund management company that use an impact approach. Owning £10,000 of their fund throughout 2017:

  • Generated 6.7mwh of renewable energy
  • Avoided 10 tonnes of carbon dioxide emissions
  • Cleaned and distributed 50,000 litres of water for reuse
  • Recycled or recovered almost a tonne of waste material
  • Provided a day of tertiary education
  • Saved £1,180 in healthcare costs

This is an example, not a recommendation to invest.

How do we expect them to perform?

According to United Nations studies, the global population will grow more than 20% to 9 billion by 2050. That means we’ll need to make major developments in areas like clean water, sanitation, energy generation and healthcare. Funds investing with sustainability at the heart of their approach have the potential to benefit from these trends.

But spotting long-term trends is the easy part. Identifying companies that can benefit most from them is harder. There are lots of factors that will affect a company’s performance over the long term which is why it’s also important to invest with a talented fund manager. Please remember that all investments fall as well as rise in value, so you could get back less than you invest.

We look at a selection of sustainable funds in our ethical sector review.

Who might be interested in sustainable and impact funds?

  • Those who want to know their money is doing something good
  • Those who want exposure to potential long term growth themes

Important information

Investments can go down as well as up in value, so you could get back less than you put in. Please ask us for advice if you’re not sure which investments are right for you. Past performance is not a guide to the future.

Number icon 4

4. ESG integrated funds

ESG integrated funds

A flexible way to invest with principles.

ESG intergreated funds

Investing in a fund that looks at ESG (environmental, social and governance) factors in its investment process is one of the least restrictive ways to incorporate your values into your investments. That said, some will still avoid investing in certain areas, like mining and tobacco, even though they technically could invest here.

When analysing a company, a manager of an ESG integrated fund will consider environmental, social and governance factors as part of their wider research. Their main goal is to invest in companies with the strongest prospects, but they think ESG factors play an important part in the long term performance of a company.

Taking ESG factors into account can help fund managers avoid potential issues. For example, a mining company might be less likely to face bad press if they have robust environmental and additional safety policies in place. And it’ll be less likely to face industrial action if it treats its workers fairly.

We look at a selection of ESG funds in more detail in our ethical sector review but each manager will work ESG factors into their investment process in a different way. For more information on how ESG is integrated into a fund, you’ll need to read its prospectus.

How do we expect them to perform?

ESG integrated funds can invest in any part of the stock market, as long as a company meets their criteria. This means they have the potential to perform just as well as funds that don’t place specific importance on ESG factors.

Who might be interested in sustainable and impact funds?

  • Those who want to invest responsibly without imposing specific restrictions on their investment
  • Those who think companies with a focus on environmental, social and governance issues could perform well over the long run
  • Those who want to make sure the diversification of their investment is not impacted by their desire to invest responsibly

Important information

Investments can go down as well as up in value, so you could get back less than you put in. Please ask us for advice if you’re not sure which investments are right for you. Past performance is not a guide to the future.

Number icon 5

5. Passive funds

Passive funds

A simple way to invest with your morals in mind.

Attitude to risk banner

What are they?

They work by tracking an index (so they're also known as index tracker funds) that filters out certain industries, like tobacco, munitions and oil & gas. There are a growing number of passive funds built with morals in mind. Key Investor Information Documents (KIIDs) will have more information on which index a fund aims to track.

Passive funds can be a great way to invest in lots of different companies at low cost. Our beginners guide to funds gives you more detail on the differences between active and passive funds.

There are two main approaches that passive funds can take.

Some passive funds will track an index like the FTSE4Good, which doesn’t include companies involved in tobacco production, weapons manufacture, and the coal power industry. This means that the fund manager won’t make any decisions on which companies are and aren’t included in the fund.

Other funds track an index that hasn't been screened, like the FTSE All-Share, and invest in all of the companies in the index that meet their criteria.

How do we expect them to perform?

The performance of funds that make their own exclusions will be different to the broader region or sector being tracked. How much it differs will depend on how restrictive the fund’s criteria is.

Passive funds that aim to track a pre-screened index, like the FTSE4Good, should see performance that’s close to that index.

Since the exclusions are likely to take out some big companies from the index, tracker funds might be more concentrated towards companies at the smaller-end of the index, which can be higher-risk, as well as cyclical businesses.

Who might be interested in passive funds?

  • Those who want to invest in a simple and easy to understand fund
  • Those who want to invest at a low cost

Number icon 6

6. Shares

Shares

Have more control over where you are invested.

Start investing banner

If you have specific criteria or beliefs that you want to be fully reflected in your investments, it might be hard for you to find a fund that completely suits your needs. Choosing individual companies to invest in might give you the best way to align your principles with your investments.

Why shares?

Investing directly in shares will give you extra control over where your money’s invested.

Control is important because ethical means different things to different people. For example, you might have concerns over investing in pharmaceuticals, but not every ethical fund manager will screen these stocks out. Simply having the word ethical in the fund’s title doesn’t mean its right for every investor.

Picking shares yourself gives you the maximum possible control. But you won't get the expertise of a professional fund manager, and remember, individual share prices can fluctuate more than a diversified investment like a fund. That means there are extra risks attached.

How to choose?

When choosing shares, you can use positive or negative screens, just like a fund manager would. But how do you choose?

Over recent years, more companies have started thinking about their position on corporate, social and environmental responsibility. And companies release more information about it than ever before.

Although this is great for visibility, it also means when choosing ethical shares there’s no substitute for research.

We think that’s fair enough. As choices of ethical investments are based on your personal perspective and objectives, it’s important to take some time to make sure your investments are right for you.

A good place to start could be a company’s annual reports. When doing so, you might want to think about whether their business activities have ethical impacts, and also who their customers and suppliers are. We offer research on a large number of shares. To access this research, just check the factsheet of the share you are interested in, and click the HL Research tab.

Regardless of whether you invest with ethical constraints in mind or not, when you pick shares you should always think about the long-term potential of the company. Buying shares in a company doomed to failure isn’t a good idea, however ethical it might be.

As we explore in our guide to picking shares, profitability, growth and dividend-paying potential are all things to consider.

Read the guide now

Important information

Please remember that the value of investments can fall as well as rise so you could get back less than you invest. If you are unsure of the suitability of your investment please seek advice. Past performance is not a guide to the future.
Have a question?

0117 900 9000

View opening times

Email us

Help & support