How to invest with purpose, without giving up performance
We live in an age where most of us try, in small but meaningful ways, to live according to our values.
We switch to greener energy tariffs. We avoid brands with poor labour records. We try to tread a little more lightly on the planet. And yet, there’s one area of life that often escapes scrutiny: our investments.
Through workplace pensions, ISAs and managed portfolios, many savers may be backing industries and practices they would never consciously support. Not out of hypocrisy – but because investing is complex, opaque and often delegated. As I often say to clients, your money is always doing something. The question is: do you know what?
Ethical investing exists to close that gap between intention and reality.
Where your money really goes
Automatic enrollment has been a huge success in getting people to save for retirement. But most workplace pensions default into broad global funds that track major stock market indices.
By design, those indices allocate significant weight to large, established sectors such as oil and gas, mining, tobacco, arms and fast fashion. These industries have powered decades of economic growth, but they don’t always align with modern environmental or social priorities.
That doesn’t mean you’re a “bad” investor. It means the system prioritises simplicity and diversification over personal values. If you’ve never checked your pension fund holdings, you’re not alone. But it’s worth a look.
What ethical investing actually means
Ethical investing isn’t about charity. It isn’t philanthropy. And it isn’t about giving up returns for the sake of feeling virtuous. At its core, it means considering environmental, social and governance (ESG) factors alongside financial returns when deciding where to allocate capital.
There are several approaches:
- Negative screening: avoiding sectors such as tobacco, controversial weapons, fossil fuels or companies linked to human rights abuses.
- Positive screening: favouring companies with strong environmental practices, good labour standards and robust governance.
- Thematic investing: targeting areas such as renewable energy, sustainable agriculture or clean transport.
- Active ownership: using shareholder votes and engagement to influence company behaviour.
For some investors, it goes further into impact investing – directing capital towards businesses specifically designed to solve environmental and social challenges.
The key point is this: ethical investing is about being intentional.
Can you invest ethically without sacrificing returns?
One of the most persistent myths is that investing ethically means accepting lower returns. That assumption rests on the idea that the most ruthless businesses will always be the most profitable. But the real world is more nuanced.
Companies with weak governance can implode. Businesses that ignore environmental risks face regulatory costs and litigation. Firms that exploit labour risk reputational damage.
Over the past decade, funds integrating ESG criteria have often performed similarly to traditional strategies, although results vary with market conditions, and past performance is not a guarantee of future returns.
During periods of volatility, such as the early months of Covid-19, companies with stronger governance and resilient business models often held up better. That’s not a guarantee of outperformance. Markets move in cycles. In recent years, energy and defence stocks have benefited from geopolitical tensions, while clean energy has faced headwinds.
But structural economic shifts – such as falling solar and wind costs, electric vehicle adoption and tighter efficiency standards – continue to reshape the global economy.
For many investors, ethical investing is less about moral positioning and more about long-term risk management.
When performance isn’t enough anymore
Increasingly, clients tell me something interesting. It’s not just about returns.
They want to know their pension isn’t financing deforestation or other destructive outcomes. They want coherence between how they live and how they invest.
There’s also a behavioural advantage. When investors feel aligned with what they own, they’re often more likely to stay invested through market turbulence and avoid panic selling. And behaviour is one of the biggest drivers of long-term outcomes.
Of course, not every fund labelled “ethical” is rigorous. Greenwashing is real. Look for transparency around exclusions, full holdings disclosure, voting records and clear methodology.
Most importantly, define what matters to you. Climate change? Labour standards? Fossil fuels? Defence? There isn’t a single “right” answer – only alignment with your priorities.
Your money is not just a store of value. It is a signal. Capital lowers the cost of funding for some activities and raises it for others.
Ethical investing doesn’t promise perfection. And returns are never guaranteed. But for many savers, it offers something powerful: the chance to align financial goals with personal values – without stepping away from long-term growth.
That isn’t about sacrifice. It’s about strategy.
David Macdonald is Founder of ethical financial planners Path Financial – a Good With Money ‘Good Egg’ company.
This article is in partnership with Path Financial.
