​Ethical and socially responsible SIPPs have gained prominence as investors increasingly seek to align their retirement savings with their values.

A recent survey by the UK Sustainable Investment and Finance Association found that 41% of UK investors have invested or plan to invest in ESG (Environmental, Social, and Governance) funds, highlighting a significant shift towards ethical investing.¹

At EveryInvestor, we delve into the advantages, potential drawbacks, and key considerations of ethical SIPPs, aiming to provide you with comprehensive insights to determine if this investment approach aligns with your retirement objectives.

Let's explore integrating responsible investments into your SIPPs...

What’s an Ethical or SRI (Socially Responsible Investment) SIPP?

An ethical or socially responsible investment (SRI) SIPP is a type of self-invested personal pension scheme that allows you to invest in companies and sectors that align with your values, particularly those that prioritise environmental sustainability and social responsibility.

This includes sectors like clean energy and companies with strong corporate governance, fair employee treatment, and efforts to reduce their carbon footprint.

Let's take a closer look at ethical investing:

What Should I Know About Ethical & Socially Responsible Investment Funds?

Ethical and socially responsible investment (SRI) funds are a type of SIPP that aim to generate both financial returns and positive social or environmental impacts, aligning your retirement savings with your values.

These funds typically avoid investments in industries associated with conventionally negative impacts, such as tobacco, weapons, or those contributing to deforestation.

Investing in ethical funds ensures that your capital supports businesses working towards a sustainable and socially responsible future, offering a way to secure financial growth while making a positive contribution to society.

Why Are Ethical/SRI SIPPs Becoming More Popular?

Ethical, SRI SIPPs, and other ‘green’ investment platforms are becoming more popular due to a combination of factors that include governement support and shifts in ivestor preferences.

These are some of the mian reasons:

• Addressing global challenges: Investors are increasingly recognising that their capital can be a powerful force for positive change, helping to tackle social and environmental issues such as poverty, inequality, education, and healthcare. 
• Changing investor preferences: Many investors are prioritising social and environmental causes and seek to align their investments with their ethical beliefs and values. 
• Corporate adoption of ESG principles: Big businesses are adopting environmental, social, and governance (ESG) principles² to improve their long-term sustainability and mitigate risks.
• Increased awareness and education: Investors are realising that they do not have to sacrifice profits for social or environmental good and that responsible investing can be both financially rewarding and socially impactful.
• Government support: Policy measures, such as the Green Finance Strategy,³ along with incentives and regulations, can play a crucial role in stimulating the expansion of ethical investing.

How Can You Identify Ethical or Socially Responsible SIPPs?

To identify a truly ethical or socially responsible SIPP, assess companies and funds using Environmental, Social, and Governance (ESG) criteria.

Think about these important questions:

Environmental Criteria

Environmental criteria in ethical SIPPs focus on investments that promote sustainability, such as renewable energy, carbon reduction, and eco-friendly practices.

Ask yourself this:

• Does the company have strong sustainability initiatives?
• What are its energy efficiency and carbon footprint policies?
• Is it involved in deforestation or other harmful environmental practices?

Social Criteria

Social criteria consider the ethical impact of investments on society, including labour rights, diversity, fair wages, and community development.

Ask yourself this:

• Does it promote diversity and inclusion?
• How does it engage with the community?
• What is its health and safety record?
• Does it produce or support controversial products?

Governance Criteria

Governance criteria assess how companies are managed, ensuring transparency, accountability, and ethical business practices—this includes board diversity, executive pay, anti-corruption measures, and shareholder rights.

Ask yourself this:

• Is it transparent in financial and business dealings?
• Does it have strong governance structures?
• Has it faced ethical violations or poor management?
• Is there diversity in leadership?

What Are the Best Ethical & Socially Responsible SIPPs? Our Top 5 Picks

For seniors seeking ethical and socially responsible SIPPS, our best recommendations include Hargreaves Lansdown’s SIPP, Fidelity's SIPP, and AJ Bell Youinvest.

These SIPPs not only offer robust investment options but also are committed to responsible investment principles.

​Here are the providers that align with these values:​

1. Hargreaves Lansdown's SIPP: Ethical Investment Options offers a dedicated portfolio for ethical investments, focusing on companies committed to social and environmental responsibility.
2. Fidelity's SIPP: Extensive Ethical Funds provides a wide range of ethical funds, enabling investors to tailor their portfolios according to personal values. ​
3. AJ Bell Youinvest: Diverse Socially Responsible Funds grants access to a variety of socially responsible funds, allowing for a customized ethical investment strategy. ​
4. Interactive Investor (ii) Ethical SIPP: Rated Sustainable Investments features the UK's first-rated list of sustainable investments, assisting investors in building a portfolio that aligns with their ethical standards. ​
5. Simply Ethical Pension: Sharia-Compliant and Ethical Investments specialises in ethical and Sharia-compliant investment portfolios, catering to investors seeking faith-based or ethical investment options. ​

What Are the Benefits & Risks of Ethical SIPPs?

The benefits of ethical SIPPs include the opportunity to invest in a portfolio that aligns with personal values; however, the risks include limited investment options compared to traditional SIPPs and the possibility of lower financial returns, as some ethical investments may carry higher risk or lower liquidity.

Here are the pros and cons:

What Are the Benefits of Ethical SIPPs?

The benefits of ethical SIPPs include values alignment, positive impact, and long-term returns.

Here's more on these benefits: 

• Values alignment: They make it possible for you to stay true to your beliefs, fostering a sense of purpose and meaning in your financial journey.
• Positive impact: By investing in socially responsible ventures, you actively support businesses contributing to a better world, and promoting societal and environmental progress.
• Long-term returns: Ethical investments demonstrate resilience over time,⁴ as companies focused on sustainability and sound governance often perform well amidst market fluctuations.

What Are the Risks of Ethical SIPPs?

The risks of ethical SIPPs include greenwashing, misaligning values, and increasing your investment risk by screening out certain sectors.

Here's more on these risks: 

• Greenwashing: This is when companies paint a positive, but false, image of their environmental efforts to attract ethical investors.⁵ This deceptive practice can undermine the true impact of Ethical SIPPs.
• Subjectivity: No industry benchmark for defining an 'ethical' investment exists. You or your fund manager may have different definitions of what this means, so research is needed to ensure a business or fund's ethical values align with your own.
• Lack of diversification: Having a diversified portfolio of investment funds is one of the fundamentals of minimising investment risk. By being too rigorous in applying your principles, your portfolio may be more limited than those that take a more conventional approach.⁶

Key Considerations for Choosing Ethical or Socially Responsible SIPPs

When choosing ethical SIPPs, the key considerations largely mirror those for any other SIPP, with the added dimension of aligning investments with your values.

These include:

• Types of investments: You can invest in stocks and shares, listed investment trusts, bonds, exchanged traded funds, and commercial property among others. With an ethical or SRI SIPP, you just have to make sure your investments align with your values.
• Tax benefits: The same tax benefits apply as with a traditional SIPP - tax relief on contributions, tax-free growth on investments, and a 25% tax-free lump sum on retirement.
• Fees and charges: Costs associated with these SIPPs could be higher as more research has gone into sourcing investments that meet your ethical criteria.

How Can You Compile an Ethical or Socially Responsible SIPP?

Compiling such a SIPP involves several steps to align your investments with your values, and these include understanding your values and diversifying your investments.

Let’s see how you can create such a pension portfolio:

What to Consider When Choosing Ethical or Socially Responsible SIPP Options

When choosing these SIPP options, evaluate available investments that align with your well-defined values and maintain a diversified portfolio to effectively mitigate risk.

If you’re unsure where to start, seek expert advice to ensure your portfolio aligns with ethical principles while achieving your financial goals.

Considerations include:

• Investment approach: Understand the best SIPP choice of investment options and assess its compatibility with your values and risk tolerance.
• Define your values: Clarify your core values and prioritise ethical and social issues when selecting investments.
• Diversify your portfolio: Build a diverse portfolio, investing in various industries and asset classes that align with your ethical criteria.
• Seek expert advice: If you’re unsure where to begin or require guidance, consult a financial advisor well-versed in ethical investments.

Ethical Investment Option Ideas

Exploring ethical investment options unveils innovative opportunities for investors to champion sustainable initiatives, advance social welfare, and make a positive impact on the world, all while pursuing financial growth.

For example:*

• The AJ Bell Responsible Growth Fund is a portfolio of companies with strong ESG credentials.
• Fidelity offers a Sustainable Investment Finder service.
• Hargreaves Lansdown includes the Responsible Investment Fund as an investment option.

*These examples are for illustrative purposes only and don’t constitute financial advice.

What Other Ethical or Green Investment Options Are Available?

Beyond ethical SIPPs, there are various socially responsible investment options, such as Socially Responsible Mutual Funds, Green Bonds, and Community Investment Funds. 

Each option offers different risk levels and returns, enabling you to tailor your portfolio to align with your unique preferences and objectives.

Common Questions

In Conclusion

Ethical and socially responsible SIPPs offer investors a pathway to grow their retirement savings while making a tangible, positive impact on society and the environment. 

However, navigating potential risks, such as greenwashing and subjective ethical criteria, is vital to ensure the credibility and authenticity of these investments. 

By diligently researching and selecting true ethical or socially responsible SIPPs, you can make responsible investment choices that contribute to a more sustainable and equitable future.