This article is from our Good ISA Guide 2022, which shows you how to invest your ISA for the good of people and planet as well as your own future.
Why an ISA?
Every adult in the UK aged over 18 can pay up to £20,000 into an ISA each year without paying any tax. For children aged under 18, the annual limit for a Junior ISA (JISA) is £9,000.
You have until the end of the financial year on April 5 to use that year’s allowance – it doesn’t roll over, so if you don’t use it you’ll lose it.
The latest HMRC figures show that a massive £75 billion was paid into 13 million Adult ISAs in 2019 to 20201. The majority of this – £48.7 billion – was paid into Cash ISAs (this is a simple savings account that you don’t pay tax on). With inflation sky-rocketing, Cash ISAs are safe but not particularly inspiring places for your money.
With a Stocks and Shares ISA, you can invest your money in funds that are helping the planet and society with the prospect of a higher profit over the long term than if you had saved in cash. However, it’s important for potential investors to remember that the value of your investments can go down as well as up and your capital is at risk.
There is also the option of an Innovative Finance ISA (IFISA), which enables you to invest directly in pioneering positive impact companies that are tackling the issues you care about most.
When ISAs first launched in 1999, the term ‘ESG’ – which stands for environmental, social and governance – had not yet been coined.
Fast forward 23 years, and there’s now around 350 sustainable funds to choose from in the UK. Recent research from sustainable investment manager Liontrust reflects increasing appetites for sustainable investing, with 43 per cent of investors polled planning to put more of their money into the sustainable or ESG sectors.
But as the number of investment funds labelled as ‘sustainable’ has grown alongside this demand, it has become increasingly difficult to work out which are really delivering on their climate or positive impact claims. There’s still a lot of information and sometimes murky claims to wade through before deciding where to put your ISA money for the best.
New regulations proposed by the UK’s Financial Conduct Authority (the FCA) are set to counter this growing challenge of greenwash. The FCA says that without common labelling standards, there is a risk that people are left overwhelmed by the vast array of choices available and unable to assess just how sustainable an investment is.
The almost endless and seemingly interchangeable use of sustainable or ethical financial terms and jargon is likely to confuse investors even further. The FCA has proposed that, “Certain investment products will be required to display a label reflecting their sustainability characteristics.” We’re waiting excitedly for firm proposals and the public consultation!
Can you get a good financial return as well as a good environmental or social one?
The good news is that there’s no longer a choice to be made between doing good with your ISA and aiming for a financial return – it is very possible to profit for your own pocket as well as the planet and society.
Around a third (31 per cent) of the investors polled by Liontrust said they chose sustainable funds because they believe they perform better financially. Indeed, Good With Money’s latest Good Investment Review, issued in partnership with Square Mile Research, found that sustainable funds have outperformed the sector average over the last five years. From October 2017 to October 2021, the ethical UK equity funds monitored in the review brought average returns of 58.7 per cent compared with 44.2 per cent for all funds in the sector.