Too embarrassed to ask: what is ESG investing?

When it comes to ethical investing, most of us immediately think of funds and which companies we’re investing our money in. But what about your run-of-the-mill, day-to-day banking needs? While an environmental, social and governance (ESG) focus is the most recent incarnation of the phenomenon, savings institutions have a long history of what might be described as social activism (for want of a better term), with mutually-owned building societies and credit unions, for example, set up to provide financial products for their members in order to develop local economies.

What makes a bank ethical?

Today, a bank or building society’s ESG principles might cover anything from where it invests your money (or often more importantly, where it will refuse to invest your money), to how it pays its staff. The market for such accounts has widened recently, with industry fledglings and the new online banks in particular keen to make their ESG credentials clear.

There’s an element of clever marketing to all this of course, but at the end of the day, the demand is there. “People are now looking for tangible changes they can make to contribute to a better way of living, as well as lowering their impact on the environment. Switching banks is actually one of the most powerful environmental changes you can make as an individual,” argues Gareth Griffiths, head of retail banking at sector veteran Triodos Bank UK.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Ethical banks for online current accounts

Across the various websites that rate banks based on their ESG criteria, online bank Triodos regularly tops the list as the most ethical provider. Like Starling – which comes second – Triodos does not invest in the military, weapons, tar sands, fracking, mining, arctic drilling, fossil fuels or coal power.

But unlike many organisations, Triodos isn’t just about avoiding companies involved in certain sectors – it actively aims to “only finance companies that focus on people, the environment or culture”. In fact, it publishes details of every organisation that it lends to. So if you really want to check that your bank is lending in alignment with your own values, Triodos gives you the transparency to make sure of it.

The bank charges £3 per month for a current account but does not allow customers to go overdrawn, or charge any hidden fees, which Triodos argues is fairer. “Our model allows costs to be shared equally by all current account customers. We also offer one of the UK’s most eco-friendly debit cards, made from 100% renewable resources,” says Griffiths.

The aforementioned Starling is an app-based bank (in effect, you run it from your phone). According to the Curiously Conscious ethical consumer blog, Starling also uses a “carbon neutral” internet hosting provider, which given its lack of physical branches, means it also has “a smaller carbon footprint than most”. There is no monthly fee for its current account, and in fact it pays a tiny but positive interest rate of 0.05%.

Branch-based ethical current accounts

If you’d prefer a provider with physical branches, a well-known brand, and a wide range of products, and you aren’t too worried about explicit statements on ethical or environmental campaigning, then as Rebecca Jones puts it on a blog for the New Money website, Nationwide, Britain’s biggest building society, is a good all-rounder which is accountable to its members (ie, its customers) rather than to shareholders.

Another high street option is The Co-operative Bank. The Co-op’s reputation took a huge hit in the wake of the “crystal methodist” scandal involving its non-executive chairman Paul Flowers in 2013. Ethical sites also tend to feel a little squeamish about the fact that its owners are US hedge funds. However, the Co-op does have an explicit ethical screening policy that commits it to not providing banking services to the weapons manufacturing industry, for example, as well as policies on animal welfare, gambling, tax avoidance and payday lending, among several others.

Its no-monthly-fee current account pays interest (termed “Everyday Rewards”) of up to £5 a month to you or to a charity of your choice, as long as you pay at least £800 a month into the account and meet other conditions, including paying out at least four direct debits from the account each month.

The best ethical savings accounts

If you’re looking for the most ethical account in which to put your savings, rather than a day-to-day current account, then there are plenty of choices out there. That said, the most ethical banks do not always pay the best interest rates. For example, Charity Bank is owned by charitable foundations and only uses its savers’ deposits to lend to charities and social enterprises, carrying out a social impact assessment for each loan it makes. And like Triodos, it’s also entirely transparent as to who it lends to. However, it only pays interest of up to 0.35% on its Ethical 33-day Notice Account.

If you are saving less than £6,000 in total and are able to drip feed it in month by month, then you can get a rate of 1.25% with Triodos, fixed for the first year. There’s a 33-day notice period, a maximum of two withdrawals a year, and you have to save at least £25 a month and a maximum of £500 a month. After the year is up, the account switches to a “Regular Savings” account, which pays just 0.05%. Triodos also offers an individual savings account (Isa) range. The 33-day notice cash Isa pays up to 0.45% while the junior cash Isa pays up to 1.5%, both of which are tax free. Meanwhile, Ecology Building Society, an ethical lender, pays a variable rate of 1.1% on its regular saver account – but only up to a maximum monthly payment of £250 – and 0.45% on its cash Isa.

But again, for those with larger sums who are willing to consider mainstream building societies rather than explicitly ethical providers, better rates are available. For example, Skipton Building Society currently pays 1.2% a year on any amount from £1 up to £1m (you shouldn’t have more than £85,000 per person in any one bank in any case) for your first year.