The Frugal Chic guide to Ethical Investing
Frugal Chic® 69: Because building wealth shouldn't cost you your values
So, you want to invest… but you don’t want to contribute to things you deem “unethical”.
This is not financial advice. Do your own research. When investing your capital is at risk.
In this letter:
The key differences between ESG funds, ethical investing and impact investing
Why a “sustainability” label doesn’t give you the full picture
Whether investing ethically actually makes a difference
The risks of building an ethical portfolio
A practical checklist for investing based on your values
I put off writing this for a while. Only because, when you talk about ethics online, it’s rarely a healthy debate. There’s no nuance.
Actually, true followers will know that I made a few videos about this back in the day.
I’ve found as a creator, a video about “how to invest £100 in the S&P 500” might get 50,000 views, a video about ethical investing would barely scrape 10,000 views and get three comments, two of them from bots.
It made me feel like people didn’t care about it, so I stopped talking about it.
Nevertheless, I think it’s an important consideration for many people when they start investing, whether that’s because of their religion, politics or personal values.
Now, you may be thinking that ethical investing is simple. Just invest in “good companies” and avoid “bad” ones.
But the reason it’s so contentious is because it’s actually much more complicated than that. There are also several different ways of investing “ethically”.
Is investing unethical
Investing, like money, is sometimes treated as inherently evil.
But investing really means owning part of a company and benefiting from its success.
When you buy a share on the stock market, you are usually buying it from another investor, rather than giving money directly to the company. The company typically received money when those shares were first issued, such as through an IPO or a later share offering.
So, in the secondary market, you are mainly:
buying ownership from someone else
gaining exposure to the company’s future profits and dividends
benefiting if other investors value the company more highly later
In other words, it is not quite as simple as handing money directly to that company. You are trading ownership based on its perceived value.
Still, that connection may not sit right with many investors.
So, let’s look at what ethical investing actually means, the different ways to approach it and whether it makes any real difference.
What is ethical investing?
It’s the intention to invest based on your values and to avoid companies involved in harm, such as war, tobacco or alcohol, for example.
The reason it’s so complex is because ethics is obviously subjective. There is no one-size-fits-all approach.
This is where my A* in A-level Religious Studies comes in handy. It’s the only A* I’ve ever got, so best believe I am passionate about this.
Key differences between ESG funds
Thinking about this from a philosophical lens, you could break the three main types into buckets of ethical camps:
Ethical investing, as we outlined, it removing categories you are unwilling to profit from. You might exclude tobacco, weapons, gambling, fossil fuels or companies involved in animal testing. If we linked it to a philosophy, it would probably be most akin to virtue philosophy; choosing outcomes based on your personal values regardless of the measurable wider impact.
ESG investing considers environmental, social and governance factors when assessing companies. However, this is not necessarily about morality. A fund manager might consider climate regulation, employee treatment or board quality because these issues could affect a company’s future profits and risks. It’s more about ‘stakeholder capitalism’, the idea that a company’s long-term success depends not only on its shareholders, but also on its employees, customers, communities, regulators and the environment.
Impact investing goes further. It aims to produce a measurable environmental or social outcome alongside a financial return, such as financing renewable-energy infrastructure, affordable housing or access to healthcare. This is akin to consequentialism - an action is judged by the outcome it creates. From this perspective, the important question is not whether your portfolio looks ethical, but whether your investment actually reduces harm or creates something positive.
why a ‘sustainability’ label doesn’t give you the full picture
An ESG fund might own a fossil-fuel producer because it is better governed than its competitors. An “improvers” fund might deliberately invest in a polluting company because the manager believes it can encourage that business to transition.
Meanwhile, an exclusion fund may refuse to own that company at all.
This disparity is evidenced by one major study that compared ESG ratings from six different providers and found that their scores were sometimes only 38 per cent correlated.
This means the same company could receive a strong sustainability rating from one provider and a much weaker rating from another. That does not make ESG scores reduntant, but it does mean they should not be treated as a universal verdict on whether a company is “good”. Source: Review of Finance
The risks of ethical investing
Alternatively, you could choose individual stocks. Maybe specifically investing in renewable energy companies, or meat alternatives. But, as we know, choosing those is far more risky than picking a fund. You need time to research and stay up to date with news, consider the timing and looking at balance sheets - as opposed to being invested in one fund that tracks an index passively.
The next best thing is an ethical or ESG fund, which can offer much broader diversification. However, the trade-off is that the fund may not perfectly match your personal ethics, and its exclusions may affect its performance.
For example, over the five years to June 2026, the MSCI World SRI Index returned 10.73 per cent a year, compared with 11.47 per cent for the standard MSCI World Index.
One reason ethical funds can fall behind is that they may exclude entire sectors that happen to perform well. For example, funds avoiding oil, gas or defence companies may underperform during periods when energy or defence stocks are booming.
But this is where the nuance comes in.
Over the ten years to June 2026, the same ethical index actually performed slightly better than the standard index. So ethical investing does not automatically mean accepting lower returns.
It simply means your portfolio will be different from the wider market. Sometimes those differences will help performance, and sometimes they will hurt it.
As you can see, like most things in life, there is a trade-off. You might get closer to your personal values, but you may accept less diversification, higher fees or periods of underperformance in return.
Whether investing ethically actually makes a difference
So, at this point, you may be wondering whether ethical investing actually makes a difference. Does it affect the economy, improve people’s wellbeing or help reduce harm?
When you are starting out and investing £100, it can feel like your money will not make much of an impact.
And honestly, on its own, it probably will not. The board members of a multimillion-pound company are unlikely to notice that one person has chosen not to invest in it.
However, when millions of individual investors and large pension funds make similar choices, companies are more likely to pay attention. Your £100 may feel small, but it becomes part of a much bigger movement, so choosing to invest based on your values is not pointless.
A 2025 Harvard Business School working paper found that impact investors were more likely than conventional private-equity investors to fund companies in disadvantaged areas and businesses with minority founders. After receiving funding, those companies were also more likely to hire women, minority workers, people with fewer qualifications and lower-income workers.
They also distributed pay increases more favourably towards minority employees and workers outside senior management. The study has not yet completed the full academic publication process, so we should not treat it as the final word, but it suggests that direct investment can influence real employment outcomes. Read the Harvard Business School research.
The evidence against it
A study published in the Review of Finance found that socially responsible funds did select companies with lower pollution, higher employee satisfaction, better workplace safety and greater board diversity.
However, the researchers found no significant evidence that money flowing into these funds caused the companies to change their behaviour. They also found little evidence that the funds tried to create change through shareholder proposals.
The researchers described this as impact washing. The funds were not necessarily lying about the companies they owned, but they appeared to take credit for positive outcomes they had not actually created. Source.
But we should be realistic. A fund sold as sustainable may still prioritise investment returns over creating the greatest possible social benefit.
So, what could you do today if you are starting small?
Practical steps:
Look into Sharia funds. These aren’t just for muslims, anyone can invest in them. They screen for companies involved in gambling, alcohol, or mainstream banking. However, you should double check each fund to ensure it actually aligns with your personal morals. Some possible ticker symbols: HIWS, SPWI.
When looking at ESG funds, look at the company’s holdings. That will give you a closer indication of whether it aligns with your values. For example, a fund might ESG compliant, but have Nestle in there - technically it might pass through the filters but you don’t deem it to be ethical.
Accept there won’t be a perfect fund. Often investing in individual stocks is far too risky and would require constant research or paying costly fees to a manager too. Instead, find the closest funds to your values and accept that investing can never be 100% ethical because ethics is subjective.
Overall, I would argue that investing ‘ethically’ is a good thing. If it’s a non-negotiable for you, then go for it.
However, I personally stick to broad-market ETFs in my portfolio, and I stand by that as my own choice based on what I feel comfortable with, my risk tolerance, time horizon and investment goals.
I am not writing this to preach something I do not practise, but to make you more aware of an option you may want to consider if it aligns with your values.
Frugal Chic is all about spending according to what you value, and your investments are no different.
Let me know what you think in the comments. Let’s have a healthy discussion.
Mia xx
Mia , thank you for writing this post . I was having a conversation about ethical investing and didn’t know where to start . This gave me practical and helpful application to get started ! This was right on time .