ISAs offer the opportunity to grow your money free from tax. If your investments go up in value and you sell them, you won’t have to pay capital gains tax. And if your investments give you income, you won’t pay UK income tax either.
Using your ISA allowance is something of a ‘no-brainer’.
As part of your allowance, a Stocks and Shares ISA can form the foundation of any investment portfolio.
With the end of the tax year just two months away, now is a great time to take advantage of your £20,000 ISA allowance. If you don’t use it by midnight on 5 April, it’s gone for good.
Why consider responsible investment for your ISA?
Responsible investment can be good for your conscience, and for your wealth.
It’s not necessarily about narrowing your investment horizons to renewable energy companies and electric vehicle makers. In its simplest form, responsible investment can just mean considering environmental, social and governance (ESG) issues.
Think things like whether a company manages its carbon emissions effectively, whether it treats its customers, staff and suppliers fairly, or whether senior managers are incentivised appropriately.
Issues related to the way a company’s managed, and its effect on the environment and society, can damage its reputation, impact profits and harm a company’s share price. Considering ESG issues when you invest is an important part of your due diligence. It can help unearth valuable insights to improve investment decisions.
ESG isn’t just about risk though. It can highlight opportunities too.
For example, a company could be making more progress when it comes to reducing carbon emissions than its competition. But if this isn’t being reflected in the share price, an opportunity could be on the cards, providing the rest of your analysis stacks up.
An option for time-poor investors
If you don’t have the time to research individual companies yourself, you could consider a fund. There’s a huge variety of responsible investment funds on offer.
While most mainstream fund managers consider ESG factors when they invest, some go further by avoiding controversial areas, like tobacco and weapons. Others look for companies that have a positive impact on the environment and society.
Here are three funds, each taking a different approach to responsible investment.
We think lots of investors could consider them for their ISAs, but this article isn’t personal advice. If you’re not sure if an investment is right for you, ask us for financial advice. The value of investments, and any income they give you, can fall as well as rise, so you could get back less than you invest.
Investing in funds isn’t right for everyone. You should only invest if the fund’s objectives are aligned with your own, and there’s a specific need for the type of investment being made. You should understand the specific risks of a fund before you invest, and make sure any new investment forms part of a diversified portfolio.
Global – wide ranging investments in global stock markets
A global ESG tracker fund could act as part of the backbone for lots of responsible portfolios.
The Legal & General Future World ESG Developed Index fund aims to track the performance of the Solactive L&G ESG Developed Markets Index. It's made up of almost 1,500 companies based across global developed markets, like the US, the UK and Japan. It’s also diversified across lots of different sectors, including technology, healthcare and financials.
The index invests more in companies that score well on a variety of ESG criteria – from the level of carbon emissions generated, to the number of women on the board and the quality of disclosure on executive pay. It also invests less in companies that score poorly on these measures.
The fund won't invest in persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption). It also won’t invest in companies involved in tobacco, controversial weapons (like cluster munitions, anti-personnel mines and chemical and biological weapons) or assault weapons.
To add to that, it also avoids companies that make more than a fifth of their revenues from thermal coal and oil sands.
So far, the fund’s managed to achieve at least a 7% reduction in carbon emissions per year and aims to do so until at least 2050. The goal is to align the fund with the Paris Agreement, which aims to limit the temperature rise caused by global emissions to 1.5°C above pre-industrial times.
FIND OUT MORE ABOUT LEGAL & GENERAL FUTURE WORLD ESG DEVELOPED INDEX, INCLUDING CHARGES
LEGAL & GENERAL FUTURE WORLD ESG DEVELOPED INDEX KEY INVESTOR INFORMATION
An option for income
The UK is a world-renowned income market, so investing here could be a great way to boost a portfolio’s income potential.
The Janus Henderson UK Responsible Income fund aims to give a good level of income, alongside capital growth over the long term. Andrew Jones has been at the helm since January 2012 and has over 20 years’ experience managing UK equity income funds.
The investment process starts with a screen. It excludes companies involved in areas some investors consider unethical, like alcohol, armaments, gambling, non-medical animal testing, nuclear power, tobacco and fossil fuel power generation. However, companies generating power from natural gas might be allowed if the company's strategy includes a clear plan to transition to renewable energy.
All investments must also be compliant with the UN Global Compact.
From the remaining universe, Jones then looks for companies with proven and understandable business models, high-quality management teams and strong positions in their industries. He also likes companies in a strong financial position with plenty of cash flow. Strong cash flow allows them to reinvest for future growth, while at the same time rewarding shareholders with rising dividends.
The manager’s flexibility to invest in smaller companies adds risk. The fund also takes charges from capital which could boost the income, but reduces the potential for capital growth.
FIND OUT MORE ABOUT JANUS HENDERSON UK RESPONSIBLE INCOME, INCLUDING CHARGES
JANUS HENDERSON UK RESPONSIBLE INCOME KEY INVESTOR INFORMATION
A more conservative option
Bonds are generally less volatile than shares – they normally don’t have as many ups and downs as shares – so they can help to diversify a portfolio focused primarily on shares.
We think the Liontrust Sustainable Future Corporate Bond fund could be a reasonable option for investing in company bonds. Managers Stuart Steven, Kenny Watson, Jack Willis and Aitken Ross form a view on the outlook of the economy and then invest in bonds issued by companies that can hopefully thrive in that environment.
Sustainability and ESG analysis is fully integrated into the team’s investment process. They look to find bonds issued by high-quality companies whose core products or services make a positive contribution to society or the environment.
The fund also uses negative screening. It won’t invest in companies that make more than 5% of revenues from animal testing services, coal, oil & gas, gambling, intensive meat and fish farming, nuclear, ozone depleting substances, pornography, tobacco or weapons systems.
Their flexibility to invest in derivatives and high yield bonds adds risk.
FIND OUT MORE ABOUT LIONTRUST SUSTAINABLE FUTURE CORPORATE BOND, INCLUDING CHARGES
LIONTRUST SUSTAINABLE FUTURE CORPORATE BOND KEY INVESTOR INFORMATION
Want to learn more about responsible investment?
If you want to learn more about responsible investing, explore the Responsible Investment section of our website.
It has everything from how to get started investing responsibly to helpful tips, and fund ideas.