How ethical are ethical funds?

If Jesus were around today, what would he invest in?

If you answered Nvidia and Apple, you'd be correct – at least, according to the Global X S&P 500 Catholic Values ETF, which "seeks to provide an efficient solution for investors looking to invest in accordance with Catholic beliefs".

This is the very same Jesus who warned against storing up treasures on Earth, which really goes to show that ethical investing is all a matter of perspective and interpretation.

After all, what does "ethical" mean to you?

• Avoiding companies that promote vices like alcohol and gambling?
• Putting your funds in businesses that want to save the planet?
• Doing your bit to fight corruption, and promote fair business practices?

Because as it turns out, it isn't a label that comes with a rulebook. And as we'll see, what gets stamped on the tin doesn't always match what's inside.

What do ethical funds actually do?

Broadly speaking, ethical funds aim to balance financial returns with a positive – or at least, less harmful – impact on the world around us. 

To this end, funds targeting an ethical outcome employ two broad strategies: positive and negative screening. 

• Negative screening. Blocking out industries or companies the fund doesn't want to touch, like tobacco, weapons, or gambling.
• Positive screening. Rather than avoiding the bad, actively seeking out companies doing good. Think renewable energy firms, companies with strong workers' rights records, or businesses leading on Environmental, Social and Governance (ESG) – environmental impact, social practices and how well they're run.

And some funds will employ a mix of both – for example, screen out the worst offenders, but then use scoring criteria to determine which companies should remain.

Negative screening: the blocklist approach

The simplest, cheapest and most popular approach for most investors is to opt for negative screening. 

These funds are usually passive, tracking a parent screened index, while using another, wider index as a performance benchmark. 

One popular example of this is the Fidelity Index World ESG Screened fund, which tracks the MSCI World IMI screened index. Another is the iShares S&P 500 Scored and Screened ETF, which tracks the S&P 500 Scored and Screened index. 

Both of these funds exclude companies involved in controversial weapons, thermal coal, oil sands and tobacco, as well as those who are non-compliant with UN Compact principles – a commitment to human rights, environmental responsibility and anticorruption principles.

But for the average retail investor using a passive tracker fund, it's incredibly hard – dare we say, impossible – to figure out which companies have been screened out. They'd likely also be surprised by which have been left in. 

Take Exxon Mobil Corp for example. Until early 2026, this firm was one of the top 10 holdings of the S&P Scored and Screened index – despite being one of the biggest corporate greenhouse gas emitters on the planet and previously being identified as one of the "world's most obstructive organisations" in the fight against fossil fuels. 

Similarly, JP Morgan and Chase – currently one of the top financiers of fossil fuels on the planet – is a top constituent of the MSCI World Screened Index. 

Would investors expect either of these companies in their screened portfolio?

Yet neither fund is doing anything shady – they're doing exactly what they promised. 

Exxon survived because the S&P index is designed to keep the least bad company in each sector – and in oil, Exxon made the cut. JP Morgan survives because the MSCI screen targets what companies do, not what they fund. Financing fossil fuel expansion isn't an excludable offence. 

The question is whether investors realise what that promise actually was.

Similarly, those passionate about human rights might hope that the UN Compact Charter holds some sway in eliminating the ne'er do wells presiding over unfair and oppressive work conditions. However, the reality is that these guidelines set pretty bare minimum behavioural standards.

Proof of this is perhaps that you'll find Amazon in most screened global index funds, despite allegations of forcing warehouse workers to operate at a dangerous pace, with injury rates 30% above the industry average – while allegedly manipulating safety data to hide it.

That's not to say that these funds are a bad choice – but they might not quite fit many investors' own definition of "ethical".

Looking for the labels: FCA regulation

When many people think of ethics, they think of sustainability – the idea that we should meet our needs today without compromising the ability of future generations to meet theirs.

And if this is your top concern, the good news is that there is some regulation in this space to help guide you. 

Until recently, any fund could label itself "sustainable" without necessarily having the evidence to back it up.

The FCA clamped down on this in 2024, introducing rules which mean that funds making sustainability claims either have to display one of four official labels – or clearly explain to investors why they don't have one. 

To qualify for a label, at least 70% of a fund's assets must genuinely align with a measurable sustainability objective. 

Funds without a label are also banned from using the words "sustainable" or "sustainability" in their name at all. 

That means when you're exploring funds, you might see:

Sustainability Impact: the most ambitious label. The fund has to demonstrate it's creating specific, measurable positive outcomes in the real world – X tonnes of carbon saved, X people given access to clean water – not just avoiding bad companies.

Sustainability Focus: the fund mainly invests in assets that are already considered sustainable – companies with strong environmental or social credentials. Think best-in-class investing with a proper evidential bar to clear.

Sustainability Improvers: the fund invests in companies that aren't quite there yet but have a credible plan to get better. The logic is that backing a company on its way to becoming more sustainable can have more real-world impact than only ever buying the already-clean ones.

Sustainability Mixed Goals: a broad label for funds that blend more than one of the above approaches.

Problem solved? Well, not entirely.

There aren't many funds that have actually chosen to carry a label – we counted just 119 – with many opting to instead issue the required consumer-facing disclosure. Most managers point to the "resource-heavy authorisation process" as a key reason for holding back. 

And confusingly, terms like "ESG", "responsible" and "green" can still be used in marketing without a label if a fund doesn't mislead investors and abides by the FCA's anti-greenwashing rules.

Added to that, all of the funds carrying an SDR label are actively managed – with a price tag to match. The passive trackers and ETFs that most people actually invest in are largely exempt, partly because many are domiciled overseas and therefore outside the FCA's jurisdiction entirely.

The result is a slightly odd situation: the regulator has built a labelling system designed to help ordinary investors make better choices, which largely excludes the cheapest and most popular way to invest.

And you're still forced to make sense of what a labelled fund is actually trying to achieve – and where it still falls short. 

Take the Royal London Global Sustainable Equity Fund for example. Despite containing a "sustainability focus" label, investors would still be exposed to companies believed to be involved in deforestation and animal exploitation.

Or the AXA Global Sustainable Managed Fund. Labelled as a "sustainability improver", Ethical Consumer found it still held companies criticised in deforestation reports and firms on the global arms industry watchlist.

Even choosing an authorised, labelled fund therefore still requires a fair degree of careful analysis for investors who want to make sure they can sleep easy at night. 

Good intentions, narrow bets: the themed route

So, what's an ordinary investor to do if they want an ETF that aligns with their moral beliefs?

One workaround is to look for a thematic ETF that targets the specific issue you care about – there are passive funds focused on clean energy, water infrastructure, gender diversity, and more. Below are just a few examples.

iShares Global Clean Energy	The biggest and most widely held clean energy ETF in the UK, tracking global solar, wind and renewable companies
Invesco Solar Energy ETF	Invests in companies involved in manufacturing, technology, and installation across the entire solar energy value chain.
Invesco Water Resources ETF	Invests in companies involved in water infrastructure, purification and conservation.
Amundi Global Gender Equality ETF	Tracks companies from around the world that score highly on gender equality, covering everything from board representation to pay gap data.
Rize Environmental Impact 100 ETF	Invests in 100 global companies developing solutions for urgent climate and environmental challenges, like clean water, renewable energy, electric vehicles, and the circular economy.

The problem is that at that point, you've drifted from ethical investing into something closer to stock picking.

For example, a clean energy ETF is also a concentrated wager on the performance of one industry, which could either pay off handsomely or just as easily leave you nursing your losses. When interest rates rose sharply in 2022-23, clean energy funds were among the hardest hit, precisely because of this lack of diversification.

That's not a reason to avoid them – some might still choose to include them as part of a wider balanced portfolio. But it is a reason to go in with your eyes open.

What about funds that call themselves "ethical"?

Opting for a fund which contains the word "ethical" in the name might seem like a relatively safe bet. And it might be – as long as you're aware they can also take wildly different approaches.

And as we've seen, any fund can use the term freely in its name without meeting any unified standard or obtaining a label – as long as any sustainability claims are clear and accurate.

Take the Liontrust UK Ethical Fund for example – one of the only funds using the word "ethical" that also carries an FCA sustainability label. An actively managed fund, its focus is to seek out companies considered to have a positive impact on people and the planet, rather than simply avoiding the bad ones.

The Troy Trojan Ethical Fund is also actively managed but is far more interested in eliminating vice than promoting virtue, screening out companies that derive significant revenue from tobacco, pornography, gambling, alcohol and high-interest lending.

Or the Nest Ethical Fund – one of five options available to Nest pension members – which takes yet another angle entirely, prioritising human rights, climate change, weapons and animal testing alongside more traditional vice exclusions like alcohol and gambling.

Then there are passive options. The L&G PMC Ethical UK Equity Index Fund tracks the FTSE4Good UK Equity Index – a rules-based index that includes companies with strong ESG scores, as well as screening for tobacco, weapons and coal.

Four funds, all calling themselves ethical – and all with different standards.

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How to find an ethical investment

So as we've seen, choosing any ethical fund will almost always involve some degree of compromise (and scrutiny).

And good place to start is by asking yourself: what do you care about most?

Once you know what matters most to you, the next step is finding a fund that actually screens for it. There's no central register of what each fund excludes, and as we've seen, the label alone won't tell you.

Luckily though, some tools do exist to make it an awful lot easier:

• Fund EcoMarket is a free database of every regulated ethical, sustainable and ESG fund available to UK investors. It lets you filter by specific exclusion criteria – animal testing, deforestation, gambling, factory farming and over 200 other issues – so you can find funds that actually screen for the things you care about, rather than just hunting by name or label. It's primarily built for financial advisers, but open to everyone.
• Fidelity's fund screener lets you filter funds by FCA sustainability label – so if you want only funds with a "Sustainability Focus" or "Sustainability Impact" label, you can narrow the field quickly. It won't tell you exactly what each fund excludes, but it's a fast way to cut out the funds that haven't cleared the regulatory bar.
• Interactive Investor's ACE 40 is a curated list of 40 funds handpicked by their in-house experts as genuinely sustainable options across different asset classes and risk levels. Rather than making you do the research yourself, it's a ready-made shortlist – useful if you want a solid starting point without wading through hundreds of funds.
• S&P Global provides ESG scores for all listed companies, measured on a scale between 0-100. The score measures how a company manages ESG risks compared to its peers within the same industry. Generally speaking, scores above 60 are considered good to excellent.

And if you're still not sure where to start, it may be worth speaking to an independent financial adviser who can match your specific values to suitable options, rather than leaving you to navigate the small print alone. This is all the more important if there's a lot of money on the line.

Are ethical funds a good investment?

The whole point of any investment is to generate a decent return, or at least to protect your money from inflation. So, do ethical funds actually deliver?

One thing to bear in mind is that you can't compare apples to oranges.

Many actively managed ethical funds have completely different asset allocations to standard global trackers, even if they aim to provide the same broad diversification. For example, many will hold higher weightings towards European and UK stocks, and hold other assets such as bonds and cash.

That, along with their active management style, makes them a fundamentally different kind of investment. Very generally speaking, they're unlikely to produce the same returns – especially once extra fees are factored in.

Still, if you're compaing apples to apples, the broad picture is encouraging.

Looking at index funds, the S&P 500 Scored and Screened has actually narrowly outperformed the S&P 500 over a 10-year period. It's a similar story for global trackers following the MSCI World IMI Screened Index.

Index	5 year annualised returns	10 year annualised returns
MSCI World IMI Screened	11.36%	13.52%
MSCI World IMI	11.15%	13.21%
S&P 500 Scored and Screened	12.30%	14%
S&P 500	11.57%	13.38%

Not exactly enough to have you cartwheeling across the room, but a decent reminder that an ethical tilt doesn't always mean leaving returns on the table.

Part of the reason for this is that screened funds tend to cut out sectors that have broadly underperformed over the past decade – fossil fuels, tobacco, coal – while keeping their heaviest weightings in the tech giants that have driven most of the market's gains. 

It's a similar story in the traditional fund space. Morgan Stanley's Institute for Sustainable Investing analysed over 11,000 mutual funds and found that ethical funds produced comparable returns to conventional ones, and held up better during periods of market volatility.

But that cuts both ways. When traditional energy sectors boom, ethical funds that exclude them can miss out entirely.

However, many also argue that sustainable companies will simply be better investments in the long run.

The thinking goes that a company serious about its environmental impact, how it treats its staff and how it's governed is also likely to be better run overall – less exposed to regulatory fines, scandals and stranded assets, and better placed for a world where sustainability is increasingly written into law.

And if the sustainable companies come out on top, that's a bonus in more ways than one. Environmentally-conscious investors might argue there's not much point chasing higher returns if the planet doesn't survive long enough for us to spend them.

Whether this makes them worth the generally higher cost – or if historically positive patterns are likely to continue – is a decision only you can make.

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