What is an ethical investment fund?

Find out what an ethical investment fund is and discover how it prioritises environmental, social and governance considerations in its investment decisions.

The objective of an ethical investment fund is to achieve positive returns for investors while prioritising environmental, social and governance (commonly known as ESG) considerations in its investment decisions. It will only invest in companies that meet a strict set of criteria, avoiding those whose products or business practices fail to meet the required standards.

How do ethical investment funds work?

There many approaches to responsible investing, and the strategy an ethical investment fund takes depends upon its investment criteria and overall objectives. Here’s a summary of the three main approaches and their differences:

  • Exclusion: this investment approach actively avoids investing money in companies and sectors that fail to meet certain criteria, or that are engaged in certain activities, such as the manufacture of heavily scrutinised products like firearms, oil or tobacco.
  • Preference: in this investment approach specific sectors are not avoided. Instead the money manager will assess each sector, and search for the best-in-class companies to invest in, dependent upon their criteria.
  • Engagement: this investment approach involves actively engaging with companies, in order to promote socially responsible business practices. This could include anything from how diverse a company’s board of directors is to its carbon emissions targets.

Sometimes a money manager will employ just one of these strategies, and sometimes a mixture of all three will be used. Ethical investment funds can also be characterised by how strict their criteria are. For example, an ethical investment fund that has strict exclusions in place is referred to as having a ‘dark green’ ethical approach, while funds which focus more on engagement are typically referred to as ‘light green’.

What are the different types of ethical investment fund?

Responsible investing is increasing in popularity and there are dozens of ethical investment funds to choose from, specialising in different areas. Some come in the shape of an ISA, others in the shape of a pension, and exactly what they invest in can differ significantly.

Some ethical funds will exclude producers and retailers of meat, poultry, fish and dairy – making them a particularly good fit for vegan investors – while others will avoid any companies that engage in human rights abuses.

If you’ve got specific investment concerns then it’s always wise to look through a fund’s factsheet, as this will tell you more about how your money will be invested. You can also speak to the scheme administrator for more information.

Where can you invest in an ethical investment fund?

Ethical investing is growing in popularity and today most of the bigger investment companies offer an ethically focused fund. PensionBee offers two responsible investment plans specially designed for those who want to invest their money in line with their values: the Future World Plan and the Shariah Plan.

The Future World Plan is focused on sustainability and stewardship in three key areas: environmental, social and governance issues. It invests in thousands of companies around the world, that have pledged to transition from the carbon economy to one based on 100% renewable energy sources. It is managed by Legal & General, who use their voting rights as shareholders at Annual General Meetings to demand positive change, rather than disinvesting.

You can find out more about our Future World Plan on our plans page.

We also have a Shariah Plan that only invests in Shariah-compliant funds, which are a branch of socially responsible investing shaped by the Islamic faith. All investments are approved by an independent Shariah committee, who work closely with the fund managers, State Street Global Advisors and HSBC.

Anyone can choose the PensionBee Shariah Plan including those who want to invest according to the Islamic faith as it excludes investments in alcohol, gambling, tobacco, military equipment or weapons, pornography and any products containing pork.

You can find out more about our Shariah Plan on our plans page.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 12-03-2020

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