Want to make a positive difference to both the world and your wallet? Great, an ethical ISA is an excellent way to put your money where your morals are.
And you’re not alone, they’re becoming hugely popular, in fact, we’re huge fans of them here at Nuts About Money, and our own money is invested in ethical ISAs.
The lowdown on ethical ISAs
Introduced by the UK government in the 90s, ISAs (Individual Savings Accounts) are a great place to keep your cash, as you don’t pay any tax when your money grows. Kerching!
This means whether your money gets invested through a Stocks & Shares ISA or grows with interest in a Cash ISA, it’s all tax-free. (there’s more about these types of ISAs below, or check out our guide to ISAs).
Each tax year – that’s from 6th April to 5th April the following year – you can invest up to £20,000 in total into your ISAs.
You can also make sure the money you save or invest does good in the world (or, at the very least, doesn’t do any harm). This is where ethical ISAs come into play. You can choose an ISA that reflects your own values.
(Note: that doesn’t mean that ‘normal’ ISAs are necessarily unethical – they're just created with different considerations in mind. ethical investing and ethical saving means you’re more conscious about how your money gets used, and who you trust with your savings).
The different types of ethical ISAs
Ethical ISAs aren’t a separate type of ISA as such, but an option within the existing ISA schemes, which are:
- Cash ISA
- Stocks & Shares ISA
- Junior ISA (Cash Junior ISA or Stocks & Shares Junior ISA)
- Lifetime ISA (Cash Lifetime ISA or Stocks & Shares Lifetime ISA)
- Innovative Finance ISA
What makes them ethical is who your money is stored with, and more importantly how your money is used and invested.
For instance, with a Cash ISA, you’ll be earning interest on your savings, it seems simple, but the ISA provider (that’s the company managing your ISA), will actually be using your savings to fund their other services such as loans to businesses – and these businesses may have a negative impact on the world. This happens with almost every bank in the UK.
So, with an ethical Cash ISA, your ISA provider would only be lending your money out to businesses that have a positive impact on the world – such as green energy companies or sustainable farming. Pretty great right?
However, due to very low interest rates, Cash ISAs won’t make your savings grow much, and unfortunately there’s not many ethical choices out there at the moment.
The real impact you can have with your savings is with Stocks & Shares ISAs. They give you the most flexibility (and the most impact) in terms of your ethical choices. Plus, your savings will grow considerably more!
Stocks & Shares ISAs are where your ISA provider will partner with an investment fund, who are experts that invest your money in successful and growing businesses with the aim of growing your money safely over time – and your money could grow a lot over 5-10 years or more – much more than in any other type of savings account. A good rule of thumb is to expect an average increase of 8% per year.
But what about ethical Stocks and Shares ISAs? Hang on, we’ll explain.
What are ethical Stocks & Shares ISAs?
Ethical Stocks and Shares ISAs allow you to invest your money without having to compromise on your morals – you can still have a positive impact in the world. The ISA provider themselves, or in collaboration with an investment fund (experts), will offer an ethical investment option for you to choose – it’s all simple for you, which will follow these 3 criteria points:
1. Steer clear of certain kinds of businesses
Often it’s not about what you invest in, but what you don’t. If you don’t want to promote gambling, for example, casinos will be a no-no. Here are some services and products that an ethical ISA might exclude:
- Arms (Weapons)
2. Include companies that make a positive social or environmental impact
This may mean they make important contributions in areas such as healthcare, education, or the environment.
The so-called “ESG framework” helps investors consider the ethical criteria that are most important to them. It stands for:
Environmental: combating pollution, climate change, water usage, and deforestation.
Social: great treatment of employees, good health and safety, diversity, and helping local communities.
Governance: corruption, inequality and bribery—and steps that are taken to mitigate this.
3. Embrace sustainable practices
You get to invest your money in businesses that won’t harm future generations, such as using green energy, or using water and land sustainably.
Do ethical Stocks & Shares ISAs perform well?
Ethical Stocks & Shares ISAs have just as much potential to perform well as regular Stocks & Shares ISAs do. In fact, many ethical investments are actually outperforming traditional funds. Put simply: you don’t have to sacrifice the growth of your money to make a positive impact on the world.
What were my other ethical ISA options?
Stocks and Shares are not the only way to invest your money ethically. Here’s how you can save and grow your money with other types of ISAs – while keeping your principles in mind.
- Ethical Cash ISAs, where you can save your money and pay no tax on the interest you earn. Getting an ethical Cash ISA is all about choosing the right ISA provider. For example, you might want to find an ISA provider (e.g. a bank or building society) that makes a positive social and environmental impact.
A good example is the Ecology building society, who provide mortgages to eco-friendly homes, and offer a Cash ISA for you to invest in.
- Ethical Innovative Finance ISAs, where you lend your money to ethical companies who need it (through your ISA), often new businesses, and these companies pay you back (plus interest) over time – and, in the spirit of the ISA, the interest you earn is tax-free. A great place for this is Triodos Bank crowdfunding platform.
- Ethical Lifetime ISAs, which are a type of ISA that allows you to save for a deposit on your first home or for your retirement. Lifetime ISAs have an incredible benefit – you can add up to £4,000 each tax year, and the government will top it up by 25%. (That’s an extra £1,000 if you do put away the full £4,000 each year. Wow!)
You can get a Lifetime ISA in the form of a Stocks & Shares Lifetime ISA, or a Cash Lifetime ISA. The same advice applies here when it comes to your ethical options: your investments can be ethical, and/or your ISA provider can be ethical – we’ve got some recommended providers for you below.
How to find the right ethical ISA for you
Although ethical ISAs are the future, they’re still fairly hard to find! And between all the ethical ISA types, we’d recommend you choose to invest in an ethical Stocks & Shares ISA rather than a Cash ISA – your money could grow a lot more over time.
To make it easy for you, we’ve done the hard work and research to find the best ethical Stocks & Shares ISAs for you, and here they are…