Ethical investing: how to build an ethical pension

We examine the best options for investors who are looking for help in building a long-term portfolio of ESG investments.

Investment funds managed according to environmental, social and governance (ESG) factors continue to multiply. But what if you want help building a portfolio of ethical, socially responsible investment (SRI) or ESG funds – inside your individual savings account (Isa) allowance or pension, for example? The good news is there is a growing number of investment platforms offering specialist ESG portfolio services that can help you do exactly that.

A good place to start could be one of the growing number of “robo advisers” now available in the UK. These online fund platforms all operate in a similar way: you complete a questionnaire designed to assess your attitude to risk, your savings and investment goals, and your time horizons; the platform then automatically puts together a portfolio of suitable holdings for you, typically picking from a broad pool of low-cost exchange traded funds (ETFs) and other passive vehicles, to meet your needs.

Automating your ESG exposure

Robo advisers have been around for a while, but many of them now offer the chance to opt for an entirely ethical or socially responsible portfolio, whether you’re investing via an Isa, a pension wrapper or on a standalone basis. 

Nutmeg, one of the UK’s first robo advisers, is a good example. It offers portfolios built entirely from ETFs that offer a tilt towards ESG factors. The service costs 0.75% a year on portfolios worth up to £100,000, the same price as its conventional managed portfolios, although note that its SRI fund costs average an extra 0.31% a year against 0.19% for other funds. 

Another option is Wealthsimple, which operates on a similar basis to Nutmeg, though it is less well-known in the UK. You’ll need at least £5,000 to access Wealthsimple’s SRI portfolios, which carry a platform charge of 0.7% a year on accounts worth up to £100,000 a year, with underlying fund charges ranging from 0.22% to 0.32%.

There’s also Tickr, which you manage from an app on your smartphone or tablet. It specialises in “impact investment”, offering portfolios focused on three specific themes: climate change, disruptive technology and equality. You can focus on specific themes or opt for a combination, with the app picking funds according to your risk appetite. 

Alternatively, Wealthify, the online investment platform owned by Aviva, also offers ESG portfolios. Unlike Nutmeg and Wealthsimple, it will put your money into products from a panel of actively-managed SRI funds, chosen according to your investment style. Its costs are competitive, though it offers a less tailor-made approach, with five set ESG portfolios to choose from, again depending on your attitude to risk.

The more traditional route

It may also be worth considering the traditional fund platforms. These platforms don’t offer advice – robo or otherwise – and while they do sometimes feature model portfolios aimed at investors fitting different types of risk category, these don’t typically include ESG-orientated options. However, most of the big platforms, including AJ Bell, Barclays, Fidelity, Hargreaves Lansdown and Interactive Investor offer useful ESG resources, including specialist information on ESG investments and in-depth analysis of ESG funds. 

Finally, don’t assume that online is the only route into ESG. Independent financial advisers (IFAs) are increasingly conscious of the huge demand for socially responsible finance and should be able to help you to plan your savings and investments accordingly.

The Ethical Investment Association (ethicalinvestment.org.uk) can help you to find an IFA with specialist knowledge of green and ethical investment options. But in reality, ESG is no longer a niche interest. “You shouldn’t have to go to a specialist adviser – any decent investment adviser should be well-versed in ESG,” argues Philippa Gee, the managing director of Philippa Gee Wealth Management.

“This is going to be even more crucial as time goes on,” adds Gee. “Investors not looking for ESG funds specifically, naturally want to consider assets which look most attractive from a long-term perspective and I think ESG is going to be one of the most interesting areas in this regard.”

Alternatives for the more adventurous

ESG-focused investors don’t have to limit themselves to conventional funds offering exposure to shares and bonds. Innovative new entrants to the ESG world offer some interesting alternatives, although you should familiarise yourself with the specific risks involved before investing.

Abundance Investment is one good example. It’s an online platform offering opportunities to invest in peer-to-peer lending to sustainable projects in areas such as renewable energy and social infrastructure. Many of these projects are eligible holdings for Isas and pensions.

Ethex is another possibility. It aims to operate as a one-stop shop for ESG-minded investors, offering access to traditional funds, ethical savings accounts and a growing number of alternative investments, including charity bonds, green bonds and debentures. Like Abundance, Ethex offers Innovative Finance Isas, the wrappers launched by the government in 2016 to support savers putting money into alternative investments.

Finally, don’t overlook tax-efficient venture capital trusts (VCTs) and enterprise investment schemes (EISs) if you’re looking for ESG exposure. Investment platform The Wealth Club, which focuses specifically on these sorts of tax-efficient funds, can help you to identify good options.

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