If you’ve decided you want to invest in line with your values, the next question is the one that most articles on ethical investing skip: where do you actually put the money? Ethical investing in a UK ISA is more practical than it was even five years ago, but the choice of funds is still narrower than the choice for conventional investors, costs are slightly higher, and the labels mean different things in different places.
This post is the practical follow-up to our piece on what ethical investing actually means. It covers the funds genuinely available to UK retail investors, what they cost, how they’ve performed, and a sensible starter approach for someone setting up their first ethical ISA.
What’s available to UK retail investors
UK Stocks and Shares ISA holders have access to broadly four types of ethical fund:
1. ESG-tilted global trackers
The largest category and the easiest entry point. These funds track a global equity index but exclude specific industries and tilt toward higher ESG-rated companies. The most widely available include:
- iShares MSCI World ESG Screened UCITS ETF (SAWD): tracks the MSCI World index excluding tobacco, controversial weapons, thermal coal, oil sands, and a handful of other categories. OCF around 0.20%.
- HSBC Developed World Sustainable Equity Index Fund: similar approach, broader exclusions, slightly different methodology. OCF around 0.20%.
- Vanguard ESG Developed World All Cap Equity Index Fund: Vanguard’s approach to ESG screening across developed markets. OCF around 0.20%.
- L&G Future World ESG Developed Index Fund: tilts more aggressively toward higher-rated ESG companies, with different exclusions. OCF around 0.30%.
These funds will look familiar to anyone used to global trackers. They hold hundreds or thousands of companies, span multiple sectors, and behave broadly like the global market with some exclusions removed. Their top holdings are usually large familiar names, although they vary depending on the methodology used.
2. Sustainable / climate-focused thematic funds
A more focused approach. These funds explicitly target companies addressing climate change, the energy transition, sustainable agriculture, or similar themes:
- iShares Global Clean Energy UCITS ETF (INRG): invests in renewable energy companies globally. OCF around 0.65%.
- L&G Clean Water UCITS ETF: companies involved in water scarcity solutions. OCF around 0.49%.
- WisdomTree Battery Solutions UCITS ETF: battery technology and electric vehicle supply chain. OCF around 0.40%.
These are higher-cost, less diversified, more volatile, and more directly aligned with specific environmental themes. They’re suitable as a satellite holding alongside a broader portfolio, not as a core fund.
3. Faith-based or values-driven funds
A specialist category serving specific religious or values communities:
- HSBC Islamic Global Equity Index Fund: Sharia-compliant global equity exposure. OCF around 0.30%.
- iShares MSCI World Islamic UCITS ETF: similar approach in ETF form. OCF around 0.60%.
Other faith-based funds exist for Christian, Buddhist, and other communities, though availability varies by platform.
4. Bond and multi-asset ethical funds
For investors wanting a less equity-heavy ethical portfolio:
- iShares ESG Aware UK Gilts UCITS ETF: UK government bonds with an ESG overlay. OCF around 0.10%.
- Various Vanguard, HSBC, and L&G multi-asset ethical funds combining global equities and bonds with ESG screening. OCFs typically 0.20% to 0.40%.
These are useful for older investors or anyone wanting a more conservative ethical allocation.
What they actually cost
The cost premium for ethical funds over conventional trackers has shrunk dramatically over the past decade, but it hasn’t disappeared. Rough comparisons:
- A conventional global equity tracker (Vanguard FTSE Global All Cap, HSBC FTSE All-World): OCF 0.13% to 0.23%.
- An ESG-screened global tracker (iShares MSCI World ESG, HSBC Sustainable Equity): OCF 0.18% to 0.30%.
- A focused thematic ethical fund (clean energy, water, climate): OCF 0.40% to 0.75%.
- An impact-focused or actively managed sustainable fund: OCF 0.60% to 1.50%.
The premium for a basic ESG screen is small (often just 0.05% to 0.10% extra). The premium for thematic or actively managed sustainable funds is much larger.
If you’re new to investing entirely, the foundational principles still apply: lower fees, broader diversification, and longer holding periods almost always beat higher-cost niche strategies over the long term. The lessons from Simple Investing for Absolute Beginners are just as true for ethical investors as for anyone else.
Performance: the honest picture
A fair question: do ethical funds underperform?
The honest answer, based on the last decade’s data, is “broadly no, with a lot of variation.”
Over rolling five and ten-year periods to the early 2020s, ESG-screened global equity funds have generally tracked very close to their conventional equivalents, sometimes slightly ahead, sometimes slightly behind, depending on the period. The exclusion of tobacco, oil and gas, and weapons happened to coincide with periods where those sectors underperformed, which made ESG funds look good on paper.
More recently (2022-2023), this pattern partially reversed. Energy stocks rallied sharply, while some ESG-favoured sectors (technology, growth stocks) struggled. ESG funds underperformed conventional trackers during this period.
The honest summary is:
- Over very long periods, ethical and conventional funds have produced similar gross returns.
- Over shorter periods, the difference depends entirely on which sectors are in or out of favour.
- After fees, ethical funds tend to give up a small amount (0.05% to 0.20% per year) due to slightly higher OCFs.
- Diversification effects mean that focused thematic ethical funds (clean energy, water) have been substantially more volatile than broad market trackers.
The expected long-run outcome from an ESG-screened global tracker is something close to but very slightly below a conventional global tracker. Whether that’s an acceptable trade-off depends on how much you value the alignment with your values.
How to build an ethical starter portfolio
For someone opening their first ethical Stocks and Shares ISA, a sensible structure depends on how much homework you want to do.
The simplest approach
A single ESG-screened global tracker. Pick one of:
- iShares MSCI World ESG Screened UCITS ETF
- HSBC Developed World Sustainable Equity Index Fund
- L&G Future World ESG Developed Index Fund
- Vanguard ESG Developed World All Cap Equity Index Fund
Hold it inside an ISA. Add to it monthly via direct debit. Don’t touch it. This gives you globally diversified equity exposure with most of the major exclusions handled for you. Total cost: around 0.20% to 0.30%, plus your platform fee.
This is the right approach for most new ethical investors. The fund won’t be perfect by anyone’s standards (they never are), but it’s a meaningful improvement on a conventional tracker and it’s straightforward to maintain.
The “core plus satellite” approach
For investors who want stronger alignment with specific themes:
- Core (70-80% of portfolio): ESG-screened global tracker (as above).
- Satellite (20-30%): one or two thematic funds aligned with your specific concerns. Clean energy, water, or sustainable agriculture, depending on what matters to you.
This gives you broad diversification through the core, with more direct thematic exposure through the satellite. The thematic portion will be more volatile, so be prepared for bigger swings in that part of the portfolio.
The fully active approach
For investors who care most about alignment and least about cost:
- An actively managed sustainable equity fund (Liontrust Sustainable Future, Royal London Sustainable World, BlackRock Sustainable Global Equity, or similar).
- Combined with thematic satellites if desired.
These funds have the strongest claim to genuine ethical credentials, but they typically charge 0.75% to 1.50% per year and have shorter track records than passive options. They’re the right choice if you’re confident in the manager’s process and willing to accept the cost premium.
Common mistakes to avoid
A few patterns to watch out for when setting up an ethical ISA:
Picking a fund based on its name alone. “Sustainable,” “ethical,” “responsible” can all mean very different things. Read the holdings list. If the fund’s top ten holdings are the same as a conventional tracker’s, ask yourself whether the screening is doing much.
Holding multiple ethical funds that all do the same thing. A common mistake. Three ESG global trackers from different providers will have largely overlapping holdings. You’d probably do better with one of them at full size, plus one thematic fund alongside.
Over-allocating to thematic funds. Clean energy is exciting, but holding 50% of your ISA in a single thematic fund leaves you exposed to the fortunes of one sector. These funds belong in the satellite portion, not the core.
Confusing personal alignment with global impact. Selling oil stocks doesn’t directly affect oil companies, because someone else buys them. The case for ethical investing is more about not personally profiting from things you find objectionable, plus the slow effect of capital flows on cost of capital. Both are legitimate, but they’re not the same as direct impact.
Neglecting fees. A 1% fund fee for ethical alignment, compounded over thirty years, can cost you tens or hundreds of thousands of pounds in foregone growth. A 0.20% ESG-screened tracker is much closer to “free ethical alignment” than an actively managed alternative.
| New to UK investing and want to get the foundations right before layering ethical choices on top? Simple Investing for Absolute Beginners takes you from zero to a properly invested ISA in plain English. [ Find out more → ] |
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Ethical investing in a UK ISA is genuinely more accessible than it used to be, but the marketing still runs ahead of the substance in many cases. Pick a fund whose actual holdings match what you care about, keep your costs reasonable, and keep contributing for the long term. The simple core approach (one ESG global tracker, held inside an ISA, contributed to monthly) will serve most ethical investors well, and you can layer in more specific thematic exposure once the basics are working.
This article is for information and education only and does not constitute financial advice. Investments can fall as well as rise in value and you may get back less than you invest. Past performance is not a reliable indicator of future results. Fund availability and OCFs change over time, so always check the most recent factsheet before investing.