What is an ESG fund?

Key takeaways

• ESG funds invest in companies that meet environmental, social and governance standards, focusing on sustainability, ethical practices and responsible leadership.
• They aim to deliver financial returns while supporting positive impact, such as tackling climate change, improving working conditions or promoting transparent business practices.
• ESG investing can be done through tax-efficient accounts, such as a Stocks & Shares Lifetime ISA, where you can invest up to £4,000 per year and receive a 25% government bonus.
• Not all ESG funds are the same, so it’s important to research what each fund invests in and whether it aligns with your personal values.
• As with any investment, capital is at risk, and returns are not guaranteed, so ESG funds are generally better suited to long-term investing.

What is an ESG fund?

ESG stands for environmental, social and governance. Put simply, an ESG fund is an investment fund that picks the companies it holds primarily because of how well they meet environmental, social and governance standards. An ESG fund is a collection of “ethical” investments designed to have a positive impact on people and the planet. It’s often referred to as sustainable investing, responsible investing, impact investing or socially responsible investing.

Here’s how each component works:

• Environmental: The environmental aspect of ESG focuses on the way a company's operations affect the environment and what measures the company takes to reduce its impact. Environmentally conscious companies might have strategies in place to tackle climate change, deforestation, or pollution, for example.
• Social: The social element of ESG is all about people. It explores how employees, suppliers and manufacturers are treated and how the company affects society as a whole. Socially conscious companies might be committed to tackling inequality, improving working conditions, and addressing human rights issues. They may donate a percentage of their profits to the local community, give employees a stake in the company, or give team members paid time off to volunteer.
• Governance: The governance component of ESG focuses on good business practices and leadership. Companies that score highly may have strategies in place to avoid conflicts of interest, use transparent accounting methods and ensure their leadership teams are diverse.

What counts as ethical to one investor might not meet another investor’s criteria, so you’ll need to do some research to find ESG funds that meet your personal values. Ethical investing can require ongoing research, too, as the companies included in a particular fund can change over time.

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FCA scrutiny of ESG labels

The FCA – the UK’s financial watchdog – is cracking down on greenwashing: funds that market themselves as ‘ESG’ without genuinely meeting environmental, social or governance standards. The regulator’s goal is to stop investors being misled and to bring in clearer labelling rules so you can see at a glance how sustainable a fund really is.

How many ESG funds are there?

In the UK, there are 373 funds that fit into the ESG category, but there are more than 14,500 funds labelled ESG across the world. Collectively, these funds held $14 trillion in assets last year, demonstrating the significant growth in ESG investing.

How to invest in ESG funds:

1. Identify your priorities

First things first, make a note of what matters most to you and what you would like to achieve. What do you want the world to look like in the future, and which companies do you believe can make it happen?

Investors should not skip this step, as it plays an important role in the ESG investing journey. It plays an important role in your ESG investing journey. After all, you want to find providers and funds that align with your values before opening an investment account.

2. Open an investment account

Once you’ve compared providers online and you’ve found the one for you, it’s time to open an investment account. Most providers make it straightforward to open an account online or through their app, often in just a few minutes.

With Tembo, you can download our app to get started. With our Stocks & Shares Lifetime ISA, you can invest up to £4,000 each tax year in a high-growth ESG fund and receive a 25% government bonus (up to £1,000) towards your first home or retirement pot each year you save into the account.

You can only use a Lifetime ISA to purchase your first home or fund retirement, so a Stocks and Shares LISA can be a way to invest for these goals over a longer period of time. If you’re planning to buy your first home in less than 5 years, for example, a Cash Lifetime ISA can be much safer. Your money won’t be invested in the stock market, but you’ll earn interest on your savings and benefit from the 25% government bonus. Take a look at our Cash LISA vs Stocks and Shares LISA guide to compare the two.

Learn more:What is a Lifetime ISA?

3. Select an ESG investment

Once you’ve opened an account, you can deposit money into your account and start buying your first investments. Some providers will ask you a series of questions during the signup process to learn about you, your financial situation, and your attitude to risk. They might use this information to recommend appropriate funds for your goals.

Providers that offer this type of service are often referred to as robo-advisers, as they offer a digital service that can help you build and manage your investment portfolio, without the costs associated with traditional financial advice.

But this type of service isn’t required for you to start investing. For example, with our Stocks & Shares Lifetime ISA, we make things simple with just one high-growth ESG fund to choose from. Find out more here.

Should you speak to a financial adviser?

If you’re investing a large amount of money (such as an inheritance, bonus or proceeds from a property sale), and your financial circumstances are particularly complicated, an independent financial advisor can help to identify the most suitable investments, navigate the complicated tax system, and even achieve better results.

Some advisors charge an ongoing fee for continuous financial planning services, usually a percentage of your portfolio. Other advisors will charge a one-off fee to clients who need one-off advice. These advisors tend to charge a set project fee or hourly rate, based on the type of advice required. Ask your financial advisor for a breakdown of fees before committing to anything.

Learn more: Top 5 financial advisors in the UK

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Are ESG funds a good investment?

ESG funds can deliver competitive – and sometimes higher – returns because many managers believe companies with strong sustainability practices are better placed for long-term success. In fact, the BlackRock MyMap 5 Select ESG fund - which is what we use for investments in our Stocks and Shares Lifetime ISA - delivered a total return of over 11%. 

Remember that past performance is not a reliable indicator of future returns, meaning they may receive back less than they invested. You can reduce the risk by investing for the long term and by building a diversified portfolio made up of multiple investments.