Ethical Stocks and Shares ISAs

What is an ethical Stocks & Shares ISA?

ISAs are ‘individual savings accounts’. Every year, the UK government allows each of us to put up to £20,000 into an ISA without paying income tax on the interest or dividends you may get from it.

A Stocks and Shares ISA is one such type of account, alongside Cash ISAs and Innovative Finance ISAs (IFISA) for which we have separate guides.

Through a Stocks and Shares ISA you essentially help fund companies – both good and bad - and like all investments it is not without financial risk. 

On the positive side, your investment can support everything from renewable energy to more sustainable farming. On the negative side, they may be riddled with all the same issues as other investments or bank accounts. Your money might be going into fossil fuel exploration; it might be linked to cluster munitions or other weapons; or it could be funding animal testing.

There are many approaches that companies can take to creating an ‘ethical’ fund or selecting ethical investments. Some investors will focus on excluding companies which, for example, are involved in problem sectors such as fossil fuels, tobacco or arms. Others may take a more ‘positive approach’ only investing in companies that meet certain criteria, e.g. are supporting climate transition, such as renewable energy companies, or have plans to meet international decarbonisation targets.

Some companies however are not transparent on what approach or criteria they use.

The platforms from which you buy your Stocks and Shares ISA often will not manage the actual funds you invest in. Instead, they will act purely as an intermediary between you as the customer and the investment company itself.

How do Stocks and Shares ISAs work?

A Stocks and Shares ISA usually acts as a ‘wrapper’ for your investment. Essentially, it is a low-tax way to invest in a fund or sometimes into stocks and shares directly. This means that you could choose any fund from our ethical investment fund guide or our fossil free fund guide and invest money into it from within a Stocks and Shares ISA.

Some of the funds allow you to do this directly from their own websites. For others you can only invest via an ISA through an 'online investment platform'. Eight of the nine providers in this guide are ‘investment platforms’, which say that they will help you to invest sustainably or ethically through your Stocks and Shares ISA. They will typically have a website or app which will ask you a series of questions about your ‘risk profile’ and ethical values. The more automated of these are sometimes rather futuristically called ‘robo advisors’. The rise of these platforms has made investing much cheaper, without having to rely on traditionally expensive financial advice.

The best funds (highlighted in our ethical investment fund guide) will not be available on all of these platforms. For example, one of our best buy ethical funds WHEB, is only available via two of the platforms we have covered here: Big Exchange and Hargreaves Landsdown. Some of the platforms use other approaches and funds we have not reviewed in our investment fund guides.

The Triodos Stocks and Shares ISA works slightly differently: it offers investments in Triodos’ own funds, which aren’t available via any other platform. We have included it in this guide because it was one of our two best buy ethical funds and you can invest into it directly on the Triodos website.

While most of these platforms work to help smaller investors find the right ‘funds’ (which each contain many companies), it is also possible to buy individual company shares directly on some of these platforms to hold in a Stocks and Shares ISA. If you’re wanting to do this, you’ll need considerable financial expertise, research and/ or advice, so we’re not covering this approach to investing in this guide.

Stocks and Shares ISAs vs Innovative Financial ISAs

Both Stocks and Shares and Innovative Financial ISAs (IFISAs) allow you to invest in companies or projects. However, unlike a Stocks and Shares ISA, an IFISA allows you to provide a direct peer-to-peer transfer of money to a company or project, on which you hope to make a financial return, rather than buying stocks or shares floated on the market.

IFISAs are generally more risky than Stocks and Shares or Cash ISAs but will give you much greater control over how ethical each element of your investment is. See our guide to Innovative Financial ISAs for more information.
 

Junior Stocks and Shares ISAs

A parent or guardian can open a Junior Stocks and Shares ISA for their child as a tax-free way to save on their behalf. The money in the account belongs to the child, but they can’t withdraw any of it until they’re 18. The Junior ISA limit is £9,000 for the tax year 2021/22 – meaning that is the maximum amount you can save in this way for that year.

Of our Best Buy companies, The Big Exchange is the only one to offer a Junior Stocks and Shares ISA. Triodos offers a Junior Cash ISA but not a Stocks and Shares option.

Choosing your own ethical Stocks & Shares ISA

In this guide, we have focused on some of the key platforms and investors claiming to be ethical or offer ethical options. However, this list isn’t exhaustive, and as ethical investing markets continue to grow, we suspect more and more companies may begin to claim to offer ethical Stocks and Shares ISA options.

We therefore think there are a few key questions you may want to consider if looking at one of these platforms:

1. What are the investment criteria?
All companies should publish details of the criteria they use to select investments or funds (even if they are a platform rather than holding the investments themselves). Look for companies with either robust exclusion criteria (for example prohibiting fossil fuels or arms companies), or clear parameters for selecting companies for inclusion (for example only those that support the energy transition through renewables).

2. Who is the company’s owner?
We always think it is important to consider where the money is going, by looking at the larger company group that a platform or investor is part of. Unfortunately, it is not always possible to know which holding company will be managing your funds if you invest through a platform, but this might also be something you want to consider.

3. What is its financial performance?
Looking at a Stocks and Shares ISAs’ historical performance may give you an idea of what your returns would be. However, remember that this can change over time.

4. How transparent is it?
Does the company publish its investment criteria? Does it provide a list of the stocks and shares that you own when you invest in its Stocks and Shares ISA?

5. What is it invested in?
An ethical option should show you exactly which funds or shares you are about to invest in. This means that you can sense check them: do they look ethical to you? Some of the platforms also allow you to select your own funds or shares from their options. It’s worth doing a bit of research before choosing but it can be a great way to ensure your ISA meets your definition of ‘ethical’.

How well do ethical Stocks and Shares ISAs perform?

Returns can vary year to year, meaning that your money is always at risk. Many of the companies offer a big variety of different Stocks and Shares ISA options, also making it hard to compare.

The year that coronavirus hit (2019-20) was unsurprisingly a bad one, with investors incurring losses averaging around 13.3%. Yet, between March 2020 and March 2021, Stocks and Shares ISAs performed much better, returning an average of 13.55%.

Although these are likely to be particularly extreme, pandemic-related examples, they show that it is hard to say with certainty what your return on investment might be. Nonetheless, if you look at Stocks and Shares ISAs for the whole period between April 1999 and April 2020, the average annual rate is 5.14%.

Below we provide a breakdown of how each company claims that its ‘ethical ready-made’ ISA options have performed on average over a 5-year period. However, for ISAs that allow you to select your own fund or company to invest in, we recommend that you research the performance of the fund or share specifically.

Triodos – the only Best Buy that has been around for five years – performed well above the average for all Stocks and Shares ISAs (which was 4.95% over five years) at 9.90-16.47%. These figures should always be considered as a snapshot, though, which can vary as markets change. It’s worth doing your own research at the point of investing.

Overall, we suggest you take these figures with a pinch of salt and use the links to look at the specific ISA option you’re considering before making an investment.

All figures were taken from websites on 9th December 2021. Date spans may vary, meaning that comparisons may not be precise. It’s best to check figures at the time you’re planning on investing.

Stocks & Shares ISA providers in this guide

The companies included in this guide are a mixture of small platforms (CIRCA5000, The Big Exchange and Clim8 Invest) and larger platforms and financial institutions.

It’s a rapidly changing market, with several recent entrants, many acquisitions, and one major player, Wealthsimple, announcing in December that it would no longer be trading in the UK.

Wealthify is owned by Aviva. Aviva is one of the strongest companies in the insurance sector when it comes to investment transparency but has been criticised for investments in companies which have links to nuclear weapons or supplying the Israeli military and government.

Hargreaves Lansdown is owned by UK billionaire Peter Hargreaves. Peter Hargreaves was the biggest individual donor to the Brexit campaign, donating £3.2 million which helped to pay for campaign promo materials to be sent to one in three homes in the UK. He has since said that he doesn’t regret his donation “one bit”, despite losing £400 million in the share price meltdown that followed the announcement of the UK’s departure from the EU.

The company is also facing a class action from 2,000 investors over the Woodford fund debacle. In 2019, a fund managed by Neil Woodford collapsed, with many small investors still waiting for their money to be returned. According to the Financial Times: "Hargreaves Lansdown is being targeted as it continued to recommend the Woodford Equity Income fund in its best buy list right up to the day of its collapse, despite awareness of the portfolio’s liquidity issues."

interactive investor (ii) is currently owned by private equity firm J.C Flowers & Co, but is soon to be bought by Abrdn for £1.5 billion. Abrdn is also an investment and asset management company and was formerly known as Standard Life Aberdeen until what The Guardian describes as “a vowel-averse name change” earlier in 2021. The buyout should see ii’s score increase from 4.5 to 7.

Bestinvest is owned by Tilney Smith & Williamson. We know that Tilney Smith & Williamson is part owned by private equity company Warburg Pincus and investment firm Permira. Because Permira (which also owns other brands like Dr Marten's shoes) is named as the 'main shareholder', Tilney picks up scores from other parts of the Permira portfolio.

Nutmeg is owned by JP Morgan Chase, which has been the world’s largest financier of fossil fuels every year since the Paris Agreement. JP Morgan Chase’s financing has been linked to everything from cluster munitions to land grabs and fires in the Amazon. The company came close to a boycott call after it was found to be the financier of the deeply unpopular Super League for European Football.

The financial giant has also been criticised by Global Justice Now for making enormous profits from debts owed by countries in the global south. Global Justice Now says:

“The amount that African governments owe to companies like BlackRock, HSBC and JP Morgan could vaccinate the entire population three times over. Global South governments also argue that debt is preventing them from investing in green technology and a just climate transition.”

In 2020, Zambia became the first African nation to announce during the pandemic that it could not make the debt repayments that big banks are refusing to delay or renegotiate. If paid back in full, big banks including JBP Morgan could make up to 250% profit on the debt.

Ethical issues with ISA providers

We looked at how the companies performed against the above criteria when it came to the Stocks and Shares ISAs that they were claiming to be ethical. Only two companies fulfilled more than three out of the four criteria.

As well as looking at the companies behind the brands, we have checked the quality and transparency of the advice that these platforms are giving to prospective ethical investors. In particular, we have checked whether they are clearly helping people to avoid fossil fuel investments.

What should companies be doing on fossil fuels?

Ideally, companies should be excluding fossil fuels across their entire investment portfolio, as Triodos does.

Failing that, they should be excluding them from their ethical products. However, with just one company found to take this approach, platforms which enable consumers to easily exclude fossil fuels themselves are also taking a step in the right direction e.g. The Big Exchange.

We think that really all companies claiming to offer an ‘ethical’ ISA should at least be asking this question of customers when helping to select the right investments for them. If a consumer opts to exclude fossil fuels, the platform should automate the exclusion process for them.

Exclusion, inclusion and transparency with Stocks and Shares ISAs

There are two meaningful approaches to ethics in this sector.

The most straightforward approach is for companies to demonstrate truly robust exclusion and inclusion criteria.

In our view, these should always exclude fossil fuels and other problem sectors such as arms, as well as supporting companies involved, for example, in climate transition. Taking this approach ensures that money is being moved away from problem sectors to more positive ones every time a customer invests. Triodos is a brilliant example of this.

Alternatively, a company can have fewer exclusion criteria – for example, allowing fossil fuels – but demonstrate exemplary transparency, enabling customers to make their own decisions.

The argument for this approach is that some multinationals remain involved in problem sectors but are genuinely in the process of transitioning away from them: for example, many of the largest green energy generators also have some remaining fossil fuel involvement. In these cases, a company should be engaging with investors or the companies themselves to understand the transition process and ensure this is being followed. The Big Exchange is a great example of this approach.

We were told by one company in this guide:

“There are almost no funds which publish more than their top ten holdings on a regular basis ... There are probably fewer than 10 funds out of 3,000 which publish full holdings detail regularly.”

This makes it all the more worth supporting the companies that do: Triodos and The Big Exchange.

How long is your money locked in for?

Generally speaking, Stocks and Shares ISAs are flexible and allow you to withdraw your money when you need to, by selling your stocks and shares. The downside is that because your money is linked to the value of companies or funds, rather than sitting in a bank, you may end up with less than you started with or had the potential to ‘earn’ if you withdraw at the wrong time. Because of this volatility, most advice suggests that saving with stocks and shares only really makes sense if you’re planning to save for the long term – perhaps five years or more.

It will also take a little more time to withdraw from a Stocks and Shares ISA compared to a Cash ISA. Usually, it takes around 3-7 working days before the stocks and shares can be sold and the money will arrive in your account.

Fees involved with Stocks and Shares ISAs

While a Stocks and Shares ISA is tax-free, that doesn’t mean it's entirely without cost. You usually have to pay a few fees, including any of:

1. Platform charge, which goes to the platform through which you invest. Can either be a flat fee (best for those investing large amounts) or a percentage of the value of your funds.
2. Fund manager charge, also known as annual management charge, which goes to the company actually managing the fund held within your ISA. Always a percentage of the amount you hold in the fund, up to 1%.
3. Selling and buying funds and shares. There is a cost every time you decide to trade your funds or shares, ranging from £0-25. Many people will just pick a fund and stay invested, in which case this fee won’t be much of an issue. But it will be more of a concern if you plan to be an active trader – i.e. to try and increase your returns by buying and selling shares and funds.
4. Transfer-out fee is the amount you will pay if you decide to move your Stocks and Shares ISA from one platform to another, usually charged per fund. However, with most Stocks and Shares ISAs you will have the option to sell your investments and receive a lump sum for free (although you may pay for selling the shares as outlined above).