Introduction
Sustainable and ethical investing has exploded in popularity in the UK over the past decade. More investors now want their money to deliver strong returns while aligning with their values.
This guide explains everything you need to know about ESG and green investments, from what they are and how they work, to the best strategies, platforms, and funds available for UK-based investors in 2025.
What is ESG Investing?
ESG stands for:
- Environmental – Companies with a focus on reducing emissions, protecting biodiversity, and promoting renewable energy.
- Social – Fair treatment of employees, diversity and inclusion, and positive community impact.
- Governance – Ethical leadership, transparent reporting, and accountability to shareholders.
Unlike traditional investing, ESG investing considers non-financial metrics alongside profitability to evaluate a company’s long-term sustainability and risk profile.
Green Investments Explained
Green investments are a subset of ESG focused specifically on the environment, often targeting:
- Renewable energy (solar, wind, hydro)
- Sustainable agriculture
- Electric vehicles (EVs) and green transport
- Carbon offset and carbon capture technologies
- Companies driving the low-carbon transition
Why ESG and Green Investments Are Growing
- Regulatory Push: UK’s commitment to net zero by 2050 drives growth in sustainable sectors.
- Investor Demand: Younger investors prioritise ethical and climate-conscious portfolios.
- Corporate Responsibility: Businesses face increasing pressure to disclose environmental and social metrics.
- Performance: Many ESG funds have matched or outperformed traditional benchmarks.
Types of ESG and Green Investments
| Type | Description | Typical Access |
|---|---|---|
| ESG Funds (Equity or Bond) | Pooled funds investing in ESG-screened companies. | ISAs, SIPPs, brokerage accounts |
| Green Bonds | Bonds funding environmentally-friendly projects. | Brokers, government schemes |
| Impact Funds | Funds aiming for measurable social or environmental outcomes. | Specialist platforms, wealth managers |
| Thematic ETFs | Exchange-traded funds targeting trends like clean energy or EVs. | Platforms like Vanguard, iShares |
| Direct Investments | Investing directly in green start-ups or renewable projects. | Crowdfunding, angel networks |
Benefits of ESG Investing
| Benefit | Explanation |
|---|---|
| Align Investments with Values | Invest in companies committed to sustainability and ethics. |
| Competitive Returns | Many ESG portfolios match or outperform traditional benchmarks. |
| Risk Management | ESG firms often have stronger governance and long-term planning. |
| Regulatory Tailwinds | Governments incentivise green sectors through subsidies and tax breaks. |
Risks of ESG and Green Investing
| Risk | Explanation |
|---|---|
| Greenwashing | Companies overstating their environmental or ethical credentials. |
| Sector Concentration | Overexposure to sectors like renewables or tech can increase volatility. |
| Lower Liquidity | Some ESG bonds or private projects can be harder to sell. |
| Performance Variability | ESG metrics are still evolving, making comparisons inconsistent. |
Top ESG and Green Investment Funds in the UK (2025)
| Fund/ETF | Type | Ongoing Charges (OCF) | Notes |
|---|---|---|---|
| iShares MSCI World SRI ETF (SUSW) | Global ESG Equity ETF | ~0.20% | Broad global exposure, SRI-screened. |
| Legal & General Future World ESG Index | Index Fund | ~0.15% | Low-cost ESG tracker. |
| Baillie Gifford Positive Change Fund | Actively Managed Equity | ~0.53% | Focused on impact and growth companies. |
| Lyxor New Energy ETF | Thematic ETF | ~0.30% | Exposure to renewable energy leaders. |
| Triodos Pioneer Impact Fund | Active Impact Fund | ~0.60% | Focus on smaller, high-impact companies. |
How to Start ESG Investing in the UK
1. Choose Your Platform
Popular UK platforms for ESG and green funds include:
- Vanguard
- Hargreaves Lansdown
- AJ Bell
- Freetrade
- Interactive Investor
- Triodos for impact funds
2. Define Your ESG Goals
- Are you focused on climate change?
- Looking for ethical governance?
- Interested in social equality?
3. Decide Your Strategy
| Strategy | Example |
|---|---|
| Passive Index Tracking | ESG ETFs like iShares MSCI SRI |
| Active Management | Funds like Baillie Gifford Positive Change |
| Thematic Investing | Clean energy or EV ETFs |
| Direct Impact | Crowdfunding sustainable start-ups |
4. Diversify Your Portfolio
Avoid overexposure to one sector by balancing ESG funds with global equity, fixed income, and alternative assets.
5. Monitor and Review
- Check for greenwashing using tools like Morningstar’s Sustainability Rating.
- Review fund performance and ESG credentials annually.
Tax-Efficient ESG Investing
| Wrapper | Benefits |
|---|---|
| ISA | Tax-free growth and withdrawals. |
| SIPP | Tax relief on contributions plus tax-free growth. |
| Junior ISA | Long-term ESG investing for children. |
ESG Performance vs Traditional Funds
| Index | 10-Year Annualised Return |
|---|---|
| MSCI World ESG Leaders | ~10.2% |
| MSCI World Index | ~9.5% |
| Clean Energy ETF Basket | ~12% (but higher volatility) |
Greenwashing: How to Avoid It
- Check fund transparency reports.
- Look for third-party ESG ratings (MSCI, Morningstar).
- Prioritise funds with clear impact metrics.
- Be wary of funds using vague “sustainability” language without data.
Who Should Invest in ESG?
ESG and green investing is ideal if you:
- Want your money to align with ethical and sustainable values.
- Have a medium to long-term investment horizon.
- Can tolerate sector-specific volatility.
- Prefer to balance financial returns with social or environmental impact.
Pros and Cons Summary
| Pros | Cons |
|---|---|
| Aligns portfolio with values | Risk of greenwashing |
| Strong long-term performance | Some funds have higher fees |
| Supports sustainable industries | Can be sector-concentrated |
| Tax efficiency via ISAs/SIPPs | ESG ratings are inconsistent |
Future Trends in ESG Investing (2025 and Beyond)
- Tighter ESG Regulation in the UK and EU.
- Growth in green bonds and sustainable fixed income products.
- Increased AI-driven ESG analysis for transparency.
- Expansion of retail access to impact-focused private equity.
Final Thoughts
ESG and green investing are no longer niche — they are mainstream and growing. For UK investors, ESG funds and green-focused ETFs can deliver competitive returns while contributing to a more sustainable future.
Whether you start with a low-cost ESG tracker in your ISA or explore direct impact investments, ESG investing offers a powerful way to align your portfolio with your principles.
