The Art of Green Finance

For residents of the UK, ISAs or individual savings accounts are essentially very attractive vehicles for sheltering cash, bonds, stocks and shares or funds, peer-to-peer lending investments or crowdfunding holdings (depending on the type of ISA) away from the tax-man. This is entirely legal and has been set up by the UK government to encourage saving and investment. Similar vehicles are not available across all developed countries and this is a comparatively great way to save or invest!

The main types of ISA available are:

1. Cash ISAs – see ethical cash ISAs below.
2. Stock and shares ISAs – see ethical stocks and shares ISAs below
3. Innovative finance ISAs (IFISAs) – see ethical IFISAs below.

Lifetime ISAs (LISAs) and Junior ISAs (JISASs) are also available. Money saving expert has a good guide to LISAs for those in the 18-39 year age range.

JISAs are tax free vehicles for under 18s. JISAs have several limitations. The money is essentially locked away until the child turns 18 and then the money becomes theirs. The cash savings rates are generally not particularly competitive and for most children the interest on their savings will be under the tax threshold in any case. If your child(ren) is (are) close to the tax threshold and you and/or your partner have not both used up your personal ISA allowances, you might prefer to allocate one ISA allowance for savings for your child(ren) in order to get the best cash interest rates and have a greater say on how your child(ren) spend(s) the money once they turn 18.

Personal ISA allowances.

In the tax year 23-24, up to £20,000 in total can be saved across the 3 main ISA types (cash, stocks and shares, IFISAs). This could be £20,000 in cash, or alternatively £20,000 could be divided among the main different ISA types, for example £5,000 in cash, £10,000 in stocks and shares and £5,000 in an IFISA. You can now open more than one cash, stocks and shares or IFISA in a single tax year. This means that if you pay £1,000 into a cash ISA in April but find a more attractive rate after this, you can simply open another cash ISA and pay your next installment into the higher paying ISA. The important thing is, that the tax-free amount is a use it or lose it offer. You cannot carry forward your ISA allowance, therefore, you should try to save or invest as much as you can up to the £20,000 limit each tax year. If you have accumulated savings across the tax year, consider moving them into an ISA each March i.e. before the end of the tax year (if you still have an ISA allowance left). This is particularly important given relatively high interest rates on savings at the moment as some savers may find they start to pay tax on savings in regular saver or current accounts.

Update: In the ’24 Spring Budget, the Conservative government discussed plans to allow an additional £5,000 of ISA allowance on top of the £20,000 current limit to those investing in a “British ISA”. A consultation period is underway and a “British ISA” will not be available until after the consultation period. Furthermore, since this announcement was made, a general election has been called and it is not clear whether or not a new government would proceed with this plan, however, the Labour party (currently ahead in the polls) have stated that they have “no plans to drop the British ISA“. The full details of the “British ISA” are still unclear however.

Ethical cash ISAs

Cash ISAs may be easy access, limited access or fixed rate and operate in a similar way to savings accounts. Up to £85,000 worth of savings per institution (i.e. several years of maximum cash ISA savings), are covered by the Financial Services Compensation Scheme (FSCS).

Climate conscious banks and building societies that pay reasonable interest rates include:

Chip Bank Easy Access ISA 5.12% via the Chip Bank App only. Enter ISABOOST to get the top rate before 22nd September 2024.

Paragon Bank. 1 year fixed rate cash ISA. 4.50% as of 18th September 2024.

Oak North Bank. 1 year fixed rate ISA 4.35% as of 18th September 2024.

Leeds Building Society 4.30% 1 year fixed rate cash ISA as of 18th September 2024.

Yorkshire Building Society. Easy access ISA. 4.30% variable as of 18th September 2024.

Coventry Building Society. 4 access (per year) ISA 4.80% variable as of 18th September 2024.

As interest rates are predicted to fall as inflation rates continue to come down, it may be worth locking in a higher interest rate with a fixed rate deal if you definitely won’t need access to the cash in the next year.

Update: Remember that as you are now allowed to open more than one cash ISA per year, if you are paying money in each month and you find a more favourable interest rate, you can now simply open up a second cash ISA with the more favourable provider.

Ethical stocks and shares ISAs

Stocks, shares, bonds or funds held in a stocks and shares ISA will be exempt from tax on dividends and capital gains. So, never buy shares, funds or bonds in a general investment account if you have any unused ISA allowance.

The first step in setting up a stocks and shares ISA is to choose a platform. The most well known platforms are AJ Bell and Hargreaves Lansdown. AJ Bell in general offers slightly lower-cost investments. Hargreaves Lansdown is more expensive for average portfolios but has arguably the more user friendly interface. Both offer ESG funds but neither are particularly outstandingly green or ethical platforms, also offering plenty of non-ESG investments. Other well established investment platforms are available, but none stand out over the big two as being significantly less expensive or more ethical.

The Big Exchange, on the other hand, is a less well established platform, founded on ethical principles. It offers investments in ESG funds only and the investment charges are competitive. Unfortunately, the online platform is not the most user friendly and you cannot trade individual shares. (Read more about why I think researching and choosing your own individual investments is the best option for ethical investors in Investing without compromising your ethics.)

There are also plenty of platforms built around robo-advisors e.g. Wealthify, Nutmeg, Moneyfarm etc. Although they offer ESG options, look carefully at their ESG policies and look at individual holdings within funds where possible. You may find they are less ethical than you are happy with.

Ethical IFISAs

Innovative finance ISAs allow you to hold crowdfunding investments or peer-to-peer lending investments. By definition, these are likely to be the most risky investments. However, some of the most interesting ethical investments available fall into this category.

Triodos Bank’s crowdfunding platform offers bonds and shares in ethical companies, some of which are eligible to be held in an IFISA – you need to check each investment offer carefully to see if it is IFISA eligible.

Ethex is a not for profit organisation that offers ethical investments, many of which can be held in an IFISA (check individual offers).

Energise Africa is a subsidiary of Ethex that offers invesetments that are likely to be very high risk (over and above the first 100 pounds which is guaranteed by Energise Africa). Given the risks, this is perhaps best thought of as a charitable donation with a chance of getting your money back which could then be re-invested into similar projects. Consider investing a small amount, for example 1% of your ISA contributions or whatever percentage you decide to use for charitable donations.

Only invest in IFISAs if you have adequate savings and understand the risks. If you decide to invest in a crowdfunding offer, only invest what you can afford to lose and aim to diversify your investment portfolio (this might include cash, gilts, funds, shares and bonds as well as crowdfunding offers for example).

You may also like Five ways of investing in renewable energy; Investing in UK gilts and is this an ethical investment?; Personal finance and introducing 1% for the planet into your budget.