In Depth

How to invest in an ethical ISA

With Isa deadline day approaching, it's time to weigh up the options – including investment ethics

For many people profit isn't everything when it comes to investing. Increasing numbers of people are also concerned with making sure their money isn't being used to fund unethical or immoral industries. For example, a survey by Triodos Bank has found that more than one in 10 investors plan to remove any investments involving fossil fuels from their portfolios over the next year.

It is possible that your money is funding all sorts of industries you wouldn't knowingly touch with a barge pole. Some of Britain's most popular investments are doing seriously dubious things with your money. Well-known funds have holdings that cover animal testing, oil production, tobacco firms and even arms trading.

So, how can you make sure your investments are ethical? The simplest thing to do is to invest in ethical funds. These are marketed as only investing in socially responsible companies and are generally more environmentally friendly and ethical than the rest of the market. But, they aren't perfect. There are no hard and fast rules on what makes an ethical fund good. It is up to the fund firm to decide what ethical stance they take.

UK funds do not have to divulge everything that they invest in – only their top 10 holdings. Unfortunately, this means you can never be 100 per cent certain about what your money is doing, even if it is in an ethical fund. For example, many investors were shocked to discover that their ethical funds held BP during the Gulf of Mexico oil spill.

If you really want to take a moral stance with your investments then you will need to invest in individual companies whose work you approve of.

What about your cash? 

While you are thinking about making sure your invested money isn't being used to make AK-47s or test make-up on rabbits, you may also want to think about what your cash savings are funding. Over the past few years the dark deeds of many of our high street banks have been brought to light. HSBC helps the rich dodge their tax bills, Co-op Bank had to admit to a £1.5bn hole in its accounts, and Barclays was found to have manipulated interbank lending rates for its own gain.

As a result of all the scandals many people don't want to leave their savings with the duplicitous banks lining the high street. So, where else can you put your cash?

If you want complete control, a decent interest rate and to know exactly what your money is funding peer-to-peer lending is an option. With Funding Circle you can lend your money to businesses that you choose, so you'll know exactly what they are doing with your money, and you can earn up to 6.5 per cent interest annually. Just be aware that peer-to-peer lending isn't covered by the Financial Services Compensation Scheme so it is more risky than keeping your money in a bank.

If you don't want to take on that risk then deposit your savings with an ethical bank. Ecology Building Society used its deposits to offer mortgages for properties and projects that respect the environment. Alternatively, Triodos Bank uses its customers' savings to fund companies involved in organic farming, renewable energy, recycling and nature conservation projects.

Just be aware of the old saying – no good deed goes unpunished. Aside from peer-to-peer lending, most ethical investing or savings options won't deliver anywhere near as big a return as you would get with the shadier options out there. If you are looking to make a decent profit you'll need to keep your ethics away from your investments.

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