Traditionally the preserve of those with mega portfolios, robo-advisers are bringing investing to the masses – allowing anyone to invest in a risk-targeted portfolio for – in some cases – as little as £1. They keep costs as low as possible by using algorithms to match investment portfolios with an individual’s appetite for risk and investing goals.
The popularity of robo-advisers has mushroomed in recent years, with the amount of money managed by these online platforms in the UK alone surging 433 per cent from £4.5 billion in 2017 to £24 billion last year.
ESG for everyone
To help meet growing interest in sustainable investing, robo-advisers have been keen to boost their ESG (environmental, social and governance) credentials by offering ‘ethical portfolios’ alongside their more traditional options.
But when it comes to investing for good, it’s important to understand what portfolios like those offered by robo-advisers can do – and can not do.
Just like their mainstream offerings, ethical portfolios from robo-advisers are typically baskets of cheap, passive funds – mostly Exchange Traded Funds (ETFs) – that are invested based on exclusions (or negative screens) that simply track markets. They may also include positive screens based on an ethical ‘scoring’ system.
Not all robo-advisers have exactly the same process. Wealthify (see below), for example, also includes some active funds, many of which are run by highly experienced human fund managers that carefully select and monitor investments.
Fundamentally, however, it is important to note that robo-adviser portfolios are not impact investment funds.
Exclusion v impact
So what’s the difference, you ask? Sustainable or impact funds should be able to precisely measure their impact: managers can say how far each investment is reducing carbon or road traffic deaths, for example, according to reports and statistics. They also regularly engage with the companies they invest in, ensuring they are striving to meet targets.
Conversely, an ETF tracking the shares of thousands of companies based on an algorithm is unable to measure its positive impact, nor engage with the companies it invests in.
This said, robo-advisers do need to be commended for opening up investing to a much wider demographic (i.e those who might otherwise not be able to afford to invest, and those who prefer to invest using a low-cost, hands-off approach). And doing something in the direction of sustainability is definitely better than doing nothing.
So if you’re looking to invest sustainably through a robo-adviser, here’s our pick of the best:
Annual fee: 0.6 per cent
Minimum investment: £1
Wealthify’s five Ethical Plans – separated to match different risk appetites – contain up to 25 dedicated ethical investment funds from providers including Kames Capital and EdenTree. Some funds in the Ethical Plans directly exclude so-called “sin stocks” like tobacco, weapons, adult entertainment, gambling, nuclear power, and unfair labour practices. Others will invest in such organisations if less than 10 per cent of their overall profits derive from these kinds of activities.
Wealthify also proactively invests in companies that are committed to making a positive impact through their ESG practices.
Unusually for a robo-adviser, Wealthify’s Ethical Plans contain both active and passive funds, which pushes up the average annual fund charge to 0.7 per cent. This is more than four times the average 0.16 per cent charged on funds in its mainstream portfolios, but comes with the potential for more positive impact than a purely passive portfolio.
Annual fee: 0.75 per cent up to £100,000, 0.35 per cent beyond
Minimum investment: £500 for ISAs and General Investment Accounts (GIAs), £100 for Lifetime ISAs and Junior ISAs
Nutmeg, one of the UK’s biggest robo-advisers, offers a range of ‘socially responsible’ investment portfolios that invest according to ethical principles.
It invests in ETFs that avoid companies engaged in controversial activities, while focusing on those that lead their peers on ESG (environmental, social and governance factors).
Using an ESG screen devised by global market aggregator MSCI, each portfolio carries a score indicating how ethical or ‘socially responsible’ it is, ranging from one for the least to 10 for the most responsible.
Unlike sustainable or impact investment funds that target specific positive outcomes – for example a reduction in Co2 emissions via a clean energy investment – Nutmeg’s portfolios invest in main markets using the MSCI screen to filter out companies that do not meet its criteria (for example tobacco and controversial weapons).