Sustainable Investing in the UK: A Comprehensive Guide

With the growing threat of climate change and social inequality, some investors are now feeling it is more important than ever that their financial goals align with their values. In the UK, one can engage in a practice known as sustainable investing through various mediums such as impact investing and ESG (environmental, social and governance) investing strategies. 

In this article, we have consulted research from several experts and institutions in the industry to provide a comprehensive guide on sustainable investing for UK investors.

Key Takeaways for UK Investors 

• Sustainable investing Involves allocating capital to investments that yield both financial returns and social and environmental benefits.  
• Strategies include ESG investing, ethical investing and impact investing. 
• UK investors can invest in green bonds, sustainable stocks or other funds that focus on sustainability.  
• Ratings are based on multiple factors and can differ between rating agencies, so in-depth research is required. 
• Organisations like the UK Sustainable Investment and Finance Association (UKSIP) make it accessible for retail investors to support sustainable investments.  

Understanding Sustainable Investing 

In this section, we explore what sustainable investing is and provide a breakdown of the different types of strategies used by investors.  

What is Sustainable Investing? 

Sustainable investing can be defined as a variety of investment strategies that have the purpose of yielding long-term returns while generating sustainable outcomes. The concept of sustainable investment has gained immense popularity over time, with three of the most common strategies explained below. 

Ethical Investing: With ethical investing or socially responsible investing (SRI), an investor determines their investment strategy on their values and beliefs. Rather than solely focusing on returns, investors take into account the widespread impact of their investments.  

ESG investing: This type of investing is focused on investing in companies with good ESG scores. ESG stands for environmental, social and governance. The ESG score represents to what extent a company engages in corporate social responsibility (CSR). Investors can also find scores of the individual pillars from the ESG spectrum. In this way, you can focus your investments more towards either environmental, social or governance impact.  

Impact Investing: This is another type of sustainable investing in which the investor tries to achieve measurable social and environmental impact while also striving for financial returns. 

The Impact of Environmental, Social, and Governance (ESG) Factors on Investments

Based on current research into this topic, the performance of ESG funds in stock and bond markets is two-sided. Some researchers say that stocks with high ESG ratings outperform other stocks, while others claim that companies with high ESG scores bear higher risks and have worse financial performance.

However, as the graph below shows, the entire sustainable fund market in the UK is worth almost six times as much compared to 2014, showing a significant shift into sustainable investing. Assets with a sustainable focus held in mutual funds and ETFs have increased from £32.93 billion in 2014 to £254.22 billion in 2024. This is a rise of 772%, whereas the total assets UK funds hold have risen by 194.8% over the same period.

Types of Sustainable Investments

Here are some of the different types of sustainable investments.

ESG Investing: Evaluating Companies with ESG Ratings 

When you evaluate the ESG rating of specific companies, it is essential to have a critical view. First of all, multiple institutions provide ESG ratings to listed companies. Institutions like Sustainalytics, MSCI and S&P all measure the ESG score in different ways, based on different factors.  

Furthermore, ESG ratings can differ between certain industries. As rating agencies pay attention to other factors, companies that pollute heavily can suddenly have high ESG scores, while companies focused on renewable energy can have low ratings. The picture clearly shows that Shell has a significantly higher ESG score than Tesla. For many, this is confusing because Shell exhausts natural resources while Tesla tries to avoid this with its electric vehicles. 

This is why it is important to do your own research and investigate the claims from different companies and ratings agencies.  

Impact Investing: Targeting Measurable Impact and Alignment with SDGs  

If investors want to achieve measurable goals regarding environmental or social impact, they can engage in impact investing. Sustainable development goals (SDGs) are a set of goals that help make a positive contribution to sustainable development. Examples of the United Nations SDGs are: no poverty, zero hunger, affordable and clean energy and reduced inequality.  

Green Finance: Investing in Renewable Energy, Green Bonds, and Climate Solutions

Green finance describes investments in funds that focus on sustainable development, like renewable energy and decarbonisation. An investor can contribute to green finance by investing in, for example: green bonds or sustainable ETFs.

For people who do not want to take the higher risk of investing in bonds and stocks, there are other options. This can be opening a green deposit or saving accounts at environmentally friendly banks. Again, research will be required to identify which UK banks focus on corporate social responsibility and maintain a high ESG rating.

Ethical Investing: Screening Out Controversial Industries and Practices

By avoiding controversial industries, you can start with ethical investing. This means that you are not investing in sectors that are not in line with your values and beliefs. Ethical investors typically steer clear of sectors such as fossil fuels and tobacco.

Exploring Sustainable Investment Options in the UK

ESG funds invest in companies that are committed to environmental, social and governance. SRI funds select investments by choosing and disqualifying companies based on the ethical practices they are involved in. 

Interestingly, research from JustETF shows that SRI funds sometimes outperform traditional funds, although it cannot be used to predict the future as it's a small sample size of years. For example, the image below compares the MSCI World ETF to the MSCI World SRI ETF.

It is important to note that the world changes and investors cannot rely on past performance, which is not a reliable indicator of future results. However, the comparison does provide interesting insight into how investors can have a sustainable investment portfolio.

Understanding Fund Managers' Investment Strategies and Risk Management  

Traditionally, the strategies of fund managers have the goal of having a healthy balance between financial returns and risk. Now, with the rise of sustainable investing, there is a third factor they have to account for. The third factor is the environmental and social impact of the investment portfolio.

Building Your Sustainable Investment Portfolio: A Step-by-Step Guide

There are various ways to build a sustainable investment portfolio.  

Integrating ESG Factors into Your Pension Plan 

An ongoing trend across pension funds is the divestment of companies that are highly engaged in fossil fuel extraction. For example, NatWest Group manages one of the biggest pension funds in the UK and has stated they are part of divestment programs to boycott the fossil fuel industry. When choosing your pension plan, it is often also possible to choose ESG-focused management of your funds.  

Understanding Fiduciary Duty and Managing Climate Risk  

Fiduciary duty implies that companies and fund managers have to act in the best interests of individuals or groups. So, whenever you let your money be invested by a fund manager, it is essential to write down and discuss the risk profile you want to take on. This also includes the percentage of investments you want in sustainable funds. By doing this, the fund manager is obligated to manage the money like you want.  

Exploring Member Engagement and Divestment Strategies 

When you actively want to engage in changing corporate behaviour, you can choose to divest certain funds. The main disadvantage of this approach is that you do not have any influence anymore. By maintaining a share in the company, you can try to encourage the company to reach its sustainability goals. Especially at big companies, there are initiatives of a group of shareholders you can join to try to make an impact, this is called shareholder activism.

Targeting Investments that Contribute to UN Goals like Poverty Reduction 

Linking your investment strategies to the SDGs of the United Nations can help to make your goals more tangible. If you pick one or two of the SDGs, you can specifically target certain goals you would like to see achieved.

How to Invest in Sustainable Stocks & ETFs 

For most retail investors, identifying individual stocks that meet your sustainability and ESG criteria can be time-consuming. This is where ETFs can be useful. An ETF, or exchange-traded fund, is an investment product that trades on a stock exchange like regular shares. However, the fund holds a basket of different stocks giving the investor broad exposure to a variety of stocks but with just one single investment.   

With the Admiral Markets Invest.MT5 account, there are many different sustainable stocks and ETFs from around the world that UK investors have access to. These include: 

• iShares MSCI USA SRI ETF. This fund aims to track the performance of the MSCI USA SRI Select Reduced Fossil Fuel Index. Its top five holdings include Microsoft, Nvidia, Tesla, Walt Disney and Verizon Communications. 
• iShares MSCI EM SRI USD ETF. This fund aims to track the performance of the MSCI EM SRI Select Reduced Fossil Fuel Index. Its top five holdings include Taiwan Semiconductor Manufacturing, Infosys, Meituan, Bharti Airtel and Netease.  
• iShares Dow Jones Global Sustainability Screened ETF. This fund aims to track the performance of an index which is composed of global leaders in the field of sustainability. Its top five holdings include Microsoft, Alphabet, Taiwan Semiconductor Manufacturing, UnitedHealth Group and Visa.  

These are just a few SRI funds Admiral Markets offers. In fact, with Admiral Markets, you can invest in over 4,500 stocks and ETFs (exchange-traded funds) from some of the largest stock exchanges in the world, with the following commissions: 

• UK stocks and ETFs – 0.1% of trade value, 1 GBP minimum commission.
• US stocks and ETFs – From $0.02 per share, 1 USD minimum commission.
• France/Germany stocks and ETFs - 0.1% of trade value, 1 EUR minimum commission. 

You can learn more about investing commissions on the Admiral Markets Contract Specification page. You can search for global stocks and ETFs from the Admiral Markets MT5 web platform and invest in four steps: 

1. Open an account with Admiral Markets.       
2. Click on Trade on one of your live or demo trading accounts to open the web platform.      
3. Search for your symbol at the top of the search window.      
4. Click Create New Order in the bottom window to open a trading ticket to input your trade size, stop loss and take profit level.   

Conclusion

Sustainable investing offers a way to combine goals regarding sustainability and creating a better future while still striving for financial returns. By understanding the core concepts of ESG investing, ethical investing and impact investing, UK investors can build portfolios that align financial returns with positive social impact.

Investors can allocate capital in green bonds, ESG funds and sustainable ETFs to generate a portfolio that aligns with certain goals, like the SDGs from the United Nations. Sustainable investing is not just a trend, with the increasing number of problems in the world, sustainable investing is likely to become more important in the future.

With access to thousands of stocks and ETFs from around the world, Admiral Markets offers socially responsible investors a large selection of instruments to choose from.   

INFORMATION ABOUT ANALYTICAL MATERIALS:  

• The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admiral Markets investment firms operating under the Admiral Markets trademark (hereinafter “Admiral Markets”) Before making any investment decisions please pay close attention to the following:  
• This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research. 
• Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content. 
• With view to protecting the interests of our clients and the objectivity of the Analysis, Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest. 
• The Analysis is prepared by an independent analyst Jitanchandra Solanki, Freelance Contributor (hereinafter "Author") based on personal estimations. 
• Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. 
• Any kind of past or modelled performance of financial instruments indicated within the content should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed. 
• Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand the risks involved.