Ethical ISAs: how ethical, sustainable and ESG investing works

What is an ethical ISA?

An ethical ISA is a Stocks and Shares ISA, or a Lifetime ISA holding investments, whose funds or shares are chosen with environmental, social or ethical aims. The ethical part is in what the ISA holds, not in the ISA itself.

gov.uk lists four types of ISA: the cash ISA, the stocks and shares ISA, the innovative finance ISA and the Lifetime ISA. A Stocks and Shares ISA can include investment funds, and a Lifetime ISA may include stocks and shares. gov.uk says there is no tax on income or capital gains from investments in an ISA. The wrapper changes how the investments are taxed, not how they perform. A Lifetime ISA takes up to £4,000 of the £20,000 yearly allowance: see the Lifetime ISA.

See what a Stocks and Shares ISA is for how the wrapper works, and compare platform fees for factual charge data.

The FCA's sustainability rules, at a glance

Anti-greenwashing rule in force

31 May 2024

Applies to all FCA-authorised firms

Fund managers could start using the labels

31 July 2024

Optional, and for UK funds only

Naming and marketing rules in force

2 December 2024

For funds that use terms such as green or climate

Investment labels

4

Focus, Improvers, Impact and Mixed Goals

What do ethical, sustainable and ESG mean?

The words are used loosely. The FCA has said that terms such as ESG, responsible, green and sustainable are open to interpretation and are often used loosely and interchangeably. ESG stands for environmental, social and governance, and the FCA treats governance as an enabler of environmental and social outcomes rather than an end in itself.

The FCA draws a line between two ideas:

• Ethical or values-based investing. Someone may want to invest in line with their values, for example by avoiding companies in activities they see as harmful. The FCA says this is different from investing with an aim to achieve positive environmental or social outcomes.
• Sustainability aims. A fund whose stated goal is to improve or pursue positive environmental or social outcomes is the kind of fund the FCA’s labels are for.

The FCA adds that where an ethical fund has, and markets, environmental or social characteristics, its naming and marketing rules apply to it.

What approaches do ethical funds use?

The FCA’s policy statement describes the approaches seen in the market. A fund can use them alone or together, and the FCA says there is no hierarchy between them.

• Screening. Applying rules that decide whether an investment is allowed. The FCA lists negative screening (excluding investments on undesirable criteria), positive screening (choosing on desirable criteria) and norms-based screening (going by compliance with widely recognised standards).
• ESG integration. Considering environmental, social and governance risks and opportunities as part of the ordinary analysis behind an investment decision, to judge what they mean for risk-adjusted returns.
• Thematic investing. Choosing assets with defined sustainability characteristics to reach specific trends.
• Impact investing. Investing with the intention of creating a positive, measurable social or environmental impact alongside a financial return.

The FCA says strategies such as exclusions, negative screening, ESG integration or basic ESG tilts alone would not be enough to qualify for a label. A fund built on those alone cannot use a label, though it can still use words such as green or climate in its name if it meets the naming and marketing conditions below.

Screening can also follow faith-based rules. Our halal ISA guide covers how Sharia-compliant ISAs work.

What are the FCA sustainability labels?

The FCA published its sustainability labelling rules in policy statement PS23/16 on 28 November 2023. Under its Handbook rules, fund managers could start using the four labels from 31 July 2024.

The labels are optional. Providers can use one if a fund meets the FCA’s criteria, but they do not have to. The FCA does not approve the use of a label. It oversees and monitors the regime, and a firm using a label must not say or imply that the FCA has approved or endorsed the fund. The labels are for UK funds (UK UCITS and UK AIFs) with sustainability objectives that aim for positive outcomes for the environment or society. The FCA has not designed them as a hierarchy: they describe different objectives and approaches.

To use a label, a fund must meet general and specific criteria. Ordinarily at least 70% of its assets must be invested in line with its sustainability objective.

The descriptions are paraphrased from the FCA’s consumer page and the descriptors in its Handbook.

What if a fund has no label?

A missing label is not a verdict on a fund. The FCA gives two reasons a fund may have none: the provider decided not to use a label, or the fund does not meet the criteria. Some funds are outside the rules altogether, including funds based outside the UK and pension funds. The FCA does not describe an unlabelled fund as unsustainable, and it says products without a label may have sustainability characteristics that are material to them.

A fund with no label can still make sustainability claims, such as having green or low carbon in its name. For a UK fund manager that does so, the FCA’s naming and marketing rules apply:

• The fund must have sustainability characteristics, and its name must accurately reflect them. The FCA’s guidance says those characteristics are expected to be material to the fund, for example at least 70% of its assets.
• The name cannot use sustainable, sustainability or impact.
• The manager must produce the same kinds of disclosure as for a labelled fund, and publish a statement where the fund is offered that “This product does not have a UK sustainable investment label”, with a brief reason why (ESG 4.3.5R).

These rules came into force on 2 December 2024. For a limited group of UK funds that were using sustainable, sustainability or impact in their names while adding a label or changing the name, the FCA allowed until 2 April 2025.

What does the anti-greenwashing rule do?

Greenwashing is when a provider, such as a bank, fund manager or insurer, claims a product is better for people or the planet than it really is. The FCA’s anti-greenwashing rule (ESG 4.3.1R) applies to every FCA-authorised firm, with or without a label. Any reference to the sustainability characteristics of a product or service must be consistent with its actual characteristics and fair, clear and not misleading. It has applied since 31 May 2024.

The FCA’s guidance on the rule (FG24/3) says sustainability claims need to be correct and capable of being substantiated, clear, complete, and fair and meaningful when compared with other products. Its first example is a fund promoted as “fossil fuel free” whose terms allow investment in companies that earn some revenue from fossil fuels below a set threshold. The FCA says that claim is misleading.

What about climate funds?

There is no separate FCA label for climate funds. The FCA’s policy statement says climate-related strategies can be accommodated within the labels as long as the other criteria are met. Its examples: a Focus fund could invest with an emphasis on climate solutions, an Impact fund could be dedicated to scaling up new climate solutions, and an Improvers fund could hold companies with credible transition plans.

Climate is also one of the sustainability terms covered by the FCA’s naming and marketing rules, alongside terms such as ESG, social, green, transition, net zero, responsible and Paris-aligned. A UK fund that uses one in its name or promotion must either use a label or meet the conditions for unlabelled funds above. The FCA’s policy statement adds that a term may need qualifying so the name does not overstate the fund, for example low-carbon tilt rather than low carbon.

Some climate funds follow a theme. The FCA lists clean energy, forest regeneration, and water and waste management among example themes. Its InvestSmart pages say funds spread across specific industries can increase concentration risk. Whether that applies depends on how a particular fund is invested.

How can you check what a fund invests in?

Firms must publish a consumer-facing disclosure in a prominent place on the page or app screen where a fund is offered. It must be clear and concise, and no longer than two printed A4 pages. For a labelled fund it covers:

• the sustainability goal and the label, at the front, with the FCA’s descriptor of the label
• any material effect of the fund’s sustainability strategy on its financial risk and return, its progress towards the goal, and any material negative environmental or social outcomes that may arise
• a plain English summary of its sustainability approach, including what it will and will not invest in, and any assets held for other reasons, such as cash, and why
• relevant metrics, with context on how to read them
• where to find other information, including costs and charges

For an unlabelled fund that uses sustainability terms, the disclosure covers what the fund will and will not invest in, relevant metrics and where to find more, and carries the no-label statement.

Platforms and advisers that distribute funds must communicate the label and disclosure for labelled funds, and the disclosure for unlabelled funds that use sustainability terms. They must also show a notice on overseas-domiciled funds that use sustainability terms, making clear that the fund is not subject to the UK regime.

Platform fees and fund charges reduce returns whatever a fund’s aims. You can compare platform fees on our platform page, which gives factual charge data, not advice.

What are the risks?

With investments your capital is at risk: their value can fall as well as rise, and you may get back less than you put in. An ethical or sustainable aim does not change that.

• The strategy can affect risk and return. The FCA requires a labelled fund’s disclosure to summarise any material effect that its sustainability strategy has, or is expected to have, on the fund’s financial risk and return.
• Not every holding serves the goal. Ordinarily at least 70% of a labelled fund’s assets must be invested in line with its sustainability objective. The rest can include assets held for other reasons, such as cash and derivatives used for liquidity and risk management, which the fund must disclose.
• Concentration. Funds spread across specific industries can increase concentration risk, according to the FCA’s InvestSmart pages.
• Claims can overreach. The FCA introduced its anti-greenwashing rule because of concern that some sustainability claims may be exaggerated or misleading. It does not approve funds’ use of labels.
• Overseas funds. Funds based outside the UK are outside the UK labelling regime.

How do you open one?

You open an ethical ISA as a Stocks and Shares ISA, or a Lifetime ISA holding stocks and shares, with an ISA provider. Our guide to how to open an ISA covers who can open one and what a provider asks for. This page does not name or recommend any provider, platform or fund.