It’s an approach that allows investors to put their money into companies considered better for society or the environment. People interested in this type of investing usually focus on one or more of these topics:

While ethical investing is an umbrella term for investing in companies that avoid morally dubious practices, there are various different approaches to achieving this goal.

Negative screening excludes industries that are deemed to be bad for the environment or for society, such as mining and weapons manufacturing. It’s the simplest and most traditional form of ethical investing and often acts as a baseline onto which other criteria can be added.

A subset of negative screen investing is faith-based investing, which excludes companies that do not align with investors’ religious beliefs.

ESG identifies companies that excel in their environmental, social and governance practices. For example, a company could be awarded a score based on factors like its pollution levels, employment practices and senior management pay scale.

Sustainable investing selects companies based on their positive contributions to society, which is an approach known as positive screening. The term ‘sustainable’ is open to interpretation, so some fund managers may prioritise companies that are working to combat climate change, while others might be more interested in businesses that support local community projects.

Impact investing is similar in premise, but it only includes companies that have made measurable pledges to improve society or the environment. They might, for example, invest in a company that has committed to cutting its carbon footprint by 25% over the next two years.

Impact investing may also use the UN’s Sustainable Development Goals as a benchmark for determining which companies to include.

A subsection of impact investing is gender lens investing, which chooses companies based in equal measure on their financial returns and the benefits they will have for women.

As an ethical investor you can choose between owning shares directly in a company that aligns with your values or investing in a fund that is managed on your behalf. Each fund will be run according to one of the above screening processes and this will dictate where the money is invested.

Ethical investing is still a relatively new investment approach and the products are therefore constantly evolving. At the moment, these are some of the most popular examples available:

These funds hold securities in companies that demonstrate they are aligned with the fund’s ethical priorities.

These funds automatically select their investments based on the socially responsible index they are tracking.

An ETF is a fund that is traded on the stock exchange. There are different types available, including sector and industry ETFs which focus on industries making a positive impact on society, and market ETFs which track an ethical index.

An equity fund is a type of mutual fund, which invests primarily in the stocks of ethical businesses. It can be actively managed by a fund manager or passively track an ethical index.

These are stocks and shares ISAs that put your money towards companies or projects that help to improve society.

Some studies suggest that companies adhering to a strict ethical code are likely to perform better, but as with any investment, there are no guarantees on returns and the value may go down as well as up.