What is an ESG fund?
Do you want to invest in the stock market while doing your bit for the planet? Investing in an ESG fund could be the answer. But what exactly is an ESG fund and are they good investments? Let’s take a look at how this type of investing works and how to get started.
Capital at risk. Past performance is not a reliable indicator of future results.
What is an ESG fund?
ESG stands for environmental, social and governance. An ESG fund is generally marketed as a collection of “ethical” investments designed to have a positive impact on people and the planet. It’s often referred to as sustainable investing, responsible investing, impact investing or socially responsible investing.
Here’s how each component works:
Environmental: The environmental aspect of ESG focuses on the way a company's operations affect the environment and what measures the company takes to reduce its impact. Environmentally conscious companies might have strategies in place to tackle climate change, deforestation, or pollution, for example.
Social: The social element of ESG is all about people. It explores how employees, suppliers and manufacturers are treated and how the company affects society as a whole. Socially conscious companies might be committed to tackling inequality, improving working conditions, and addressing human rights issues. They may donate a percentage of their profits to the local community, give employees a stake in the company, or give team members paid time off to volunteer.
Governance: The governance component of ESG focuses on good business practices and leadership. Companies that score highly may have strategies in place to avoid conflicts of interest, use transparent accounting methods and ensure their leadership teams are diverse.
What counts as ethical to one investor might not meet another investor’s criteria, so you’ll need to do some research to find ESG funds that meet your personal values. Ethical investing can require ongoing research too, as the companies included in a particular fund can change over time.
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Did you know?
The FCA - the financial watchdog - are currently looking into ESGs because some funds have called themselves "ESG" to be more appealing to customers, with very little or no environmental, social or governance component built into their fund. It's an ongoing issue, but the FCA ultimately want to ensure customers are not misled with their investments.
Invest in an ESG fund with our Stocks & Shares Lifetime ISA
Invest up to £4,000 per tax year in a high growth ESG fund – and receive a 25% government bonus to boost your first home deposit or retirement pot up to £1,000.
When considering opening a LISA, remember that withdrawals for any purpose other than buying a first home or for retirement will incur a 25% government penalty, meaning you may get back less than you paid in.
How many ESG funds are there?
In the UK, there are 373 funds that fit into the ESG category, but there are more than 14,500 funds labelled ESG across the world. Collectively, these funds held $7 trillion in assets last year, showing just how popular ESG investments have become!
Learn more: Should I get an ISA?
How to invest in ESG funds:
1. Identify your priorities
First things first, make a note of what matters most to you and what you’d like to achieve. What do you want the world to look like in future and which companies do you think can make it happen?
We know how excited you probably are to get started, but don’t skip this step! It plays an important role in your ESG investing journey. After all, you want to find providers and funds that align with your values, before opening an investment account.
2. Open an investment account
Once you’ve compared providers online and you’ve found the one for you, it’s time to open an investment account. Many providers let you open an account in minutes, either online or by downloading an app.
At Tembo, for example, simply download our app to get started. With our Stocks & Shares Lifetime ISA, you can invest up to £4,000 each tax year in a high-growth ESG fund and receive a 25% government bonus (up to £1,000) towards your first home or retirement pot each year you save into the account.
You can only use a Lifetime ISA to purchase your first home, or fund retirement, so a Stocks and Shares LISA can be a way to invest for these goals over a longer period of time. If you’re planning to buy your first home in less than 5 years, for example, a Cash Lifetime ISA can be much safer. Your money won’t be invested in the stock market, but you’ll earn interest on your savings and benefit from the 25% government bonus. Take a look at our Cash LISA vs Stocks and Shares LISA guide to compare the two.
Learn more: What is a Lifetime ISA?
A LISA must be open for at least 12 months before being used to buy a home, and you must be aged between 18-39 to open one.
3. Select an ESG investment
Once you’ve opened an account, you can deposit money into your account and start buying your first investments. Some providers will ask you a series of questions during the signup process to learn about you, your financial situation, and your attitude to risk. They might use this information to recommend appropriate funds for your goals. Providers that offer this type of service are often referred to as robo-advisers, as they offer a digital service that can help you build and manage your investment portfolio, without the costs associated with traditional financial advice.
Should you speak to a financial advisor?
If you’re investing a large amount of money (such as an inheritance, bonus or proceeds from a property sale) or your financial circumstances are particularly complicated, an independent financial advisor can help to identify the most suitable investments, navigate the complicated tax system, and even achieve better results.
Some advisors will only charge an ongoing fee for ongoing financial planning services, usually a percentage of your portfolio. Other advisors will charge a one-off fee to clients who need one-off advice. These advisors tend to charge a set project fee or hourly rate, based on the type of advice required. Ask your financial advisor for a breakdown of fees before committing to anything.
Learn more: Top 5 financial advisors in the UK
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Are ESG funds a good investment?
Yes, ESG funds can be a good investment. In fact, the Blackrock MyMap 5 Select ESG fund delivered a total return of over 12% in 2023. Remember that past performance is not a reliable indicator of future returns when investing, meaning you may get back less than you put in. You can reduce the risk by investing for the long term and by building a diversified portfolio made up of a number of investments.
Start investing for a better world and your future today
Invest up to £4,000 per tax year in a high-growth ESG fund with our Stocks and Shares Lifetime ISA.
