Socially responsible investing with Nutmeg

At a glance

• Responsible investment remains of interest to investors despite geopolitical pressures.
• Contrary to what some investors believe, based on the data we've seen, portfolios with a socially responsible focus perform similarly to those without one in terms of returns.
• We score all of our Nutmeg portfolios including our Socially Responsible Investing (SRI) portfolios against a range of environmental, social and governance (ESG) factors, information that is available to customers.
• Regulation exists to help protect investors.

Investing with a socially responsible focus means favouring companies with good governance, including those that put into action environmental initiatives, or those that have sustainability goals for health, poverty, education, or equal access to resources. 

It also means avoiding companies that engage in controversial activities, such as those involved in arms, fossil fuels, tobacco, or adult entertainment.  

Responsible investment has gained significant momentum over the past decade. Despite shifting attitudes towards ESG in the US, global sustainable open-end and exchange traded funds (ETFs) recorded estimated net inflows of $4.9 billion in the second quarter of 2025. Global sustainable fund assets increased by 10% to $3.5 trillion.

Responsible investment therefore remains an important consideration for many investors. We recognise that introducing ethics to investing elicits a range of responses, and that investors might want to know how SRI performance compares with non-SRI investments before deciding if it is right for them. 

We think it's important to provide understanding of the measurement and scoring side of responsible investing. ESG regulation is an important safeguard against greenwashing, the act of making misleading or false statements about the environmental characteristics of a product or practice. 

Here we cover how we score our portfolios, in accordance with ESG regulation, and how our SRI investment style performs.

Analysing investment performance

Some investors may wonder whether their desire to invest ethically could come at a cost to the performance of their portfolio. 

Contrary to what some investors believe, based on the data we've seen, portfolios with a socially responsible focus perform similarly to those without one in terms of returns. Our studies used the same established SRI investment strategies that underpin many of the SRI-focused exchange-traded funds in our portfolios. These returns can be seen below, from the date of inception of the socially responsible indices.

Table 1: Equity Market Performance and Risk, Local Currency: October 2007 to June 2025

Nutmeg calculations using data from Macrobond. MSCI indices used for each country/region. Annualised Volatility – which measures the variability of returns scaled to a yearly time horizon – is based on monthly return data. These figures refer to past performance, which is not a reliable indicator of future performance.

Overall, we expect our SRI portfolios to deliver performance over the long-term that is similar to that of an equivalent portfolio without an SRI focus, so we don’t expect there to be a performance trade-off for investors, although this can never be guaranteed.

Regulating responsible investment

Regulation exists to help protect investors. Regulators have sought to clamp down on greenwashing, where an entity makes misleading claims about the environmental credentials of a product, service or company. Regulatory standards can be useful in helping to ensure that the names of investment products accurately reflect their environmental or social characteristics.

To be allowed to use the term 'Socially Responsible Investing' in the investment style, the ETFs used by Nutmeg have to be measured against a Paris-Aligned Benchmark (PAB). A PAB sets revenue thresholds for fossil fuel-related businesses to allow the use of terms like 'sustainable', 'green', 'impact', and 'ESG'.

The rules around PABs are stricter than those for ETFs that refer to ‘transition’ or ‘social’ factors, which track a Climate Transition Benchmark (CTB). CTBs, at a minimum, require screens to filter for tobacco, controversial weapons and/or violations of social norms.

There has been a substantial push from European and UK regulators on ESG disclosures. The resulting changes from the European regulator, the European Securities and Markets Authority (ESMA), state that products which are domiciled in Europe and follow an ESG/SRI approach, which many of the ETFs listed in the UK do, must use either a CTB or a PAB to include certain terms in the fund's name. This framework aims to prevent greenwashing.

Asset managers that wish to use the labels of ESG and SRI must use a PAB, while those wanting to follow a lighter approach must use a CTB. Under both circumstances, a minimum of 80% of investments must meet environmental or social characteristics, or a sustainable investment objective with binding elements. Nutmeg meets this threshold.

How we measure SRI

We invest primarily through ETFs which contain a mixture of equities and bonds, and those underlying assets within the ETFs are measured as part of the ESG scores.

Our clients can have multiple different investment 'pots' within a single portfolio, and they have visibility over the following scores at a 'pot' level.

When measuring SRI, we use ESG ratings and data from MSCI, one of the world’s largest investment research and financial index businesses. MSCI provides one of the largest standardised frameworks for assessment of ESG factors available globally, covering over 17,000 security issuers (including subsidiaries) and nearly one million equity and fixed income securities (as of 30 June 2024). MSCI's ESG ratings are designed to measure companies' resilience to financially relevant, industry-specific sustainability risks and opportunities. We update our scores in line with changes made to MSCI's framework. Other ESG ratings providers are available.

At the time of writing, ESG ratings providers can adhere to a voluntary code of conduct created by the International Capital Market Association and the International Regulatory Strategy Group, which MSCI ESG Research has signed up to. The code helps to promote transparency, good governance, the management of conflicts of interest, and the strengthening of systems and controls in the sector. 

However, plans are in motion in the UK to formally regulate ESG ratings providers. Providers will need to be authorised by the UK Financial Conduct Authority and comply with the regulatory regime. The UK government hopes that bringing providers into regulation will help improve investor confidence and reduce greenwashing.

Our SRI portfolios apply a heavier focus than other investment styles on certain ESG factors, investing our SRI portfolios in ETFs that overweight towards companies with good governance profiles, whilst avoiding those that engage in controversial activities". However, across all of our investment styles – including SRI – we offer our clients insight into how each of our investment portfolios measures against a range of ESG factors. Each of these scores provides you with a breakdown of how your capital is invested in line with ESG considerations.

Overall ESG score

This is the overall ESG score, measuring the aggregate ability of the underlying companies held by the ETFs we invest in to manage key risks and opportunities arising from environmental, social, and governance factors. The individual scores for each of those categories are represented below.

Environmental Score

This measures how companies in the underlying ETFs are exposed to and manage key environmental risks and opportunities, such as emissions, climate change, pollution, and use of natural resources.

Water Stress 

This score measures exposure to companies that proactively employ water-efficient processes, water recycling, and alternative water sources. Companies employing these practices will score higher.

Carbon Intensity

This score measures exposure to carbon-intensive companies. We’ll also show you what this means in terms that are easy to understand – for example, the equivalent miles driven by an average petrol passenger car.

It measures how companies in the underlying ETF are exposed to and manage key environmental risks and opportunities, such as climate change, pollution, and use of natural resources.

Social Score

This score measures how companies in the underlying ETFs are exposed to and manage key social risks and opportunities, such as labour management, health and safety, and data security.

Labour Management

This score accounts for exposure to labour unrest and poor job satisfaction. Companies providing strong employment benefits, performance incentives, employee engagement, and professional development programmes score higher.

Privacy and Data Security

This score accounts for how companies in the underlying ETFs manage privacy and data security. Those with comprehensive privacy policies and data security management systems and business models not reliant on trafficking personal data score higher.

Governance Score

A governance score measures the holding’s management of, and exposure to, key governance risks and opportunities.

Women Represent 30% of Directors

The proportion of the underlying ETF invested in companies where women comprise at least 30% of the board of directors. Board diversity is itself important and has been shown to contribute to a business’s financial success.

Business Ethics and Fraud

This score evaluates industry-specific business ethics issues for the companies in the underlying ETF. Companies which have faced controversies with respect to anti-competitive practices, pricing fraud, insider trading, and controversial customer practices score lower.

How do I invest ethically with Nutmeg?

The Nutmeg Socially Responsible Investing portfolios are available across all of our products: our Stocks and Shares ISA, Junior ISA, Lifetime ISA, Personal Pension, and General Investment Account. 

Our in-house investment team will invest according to your appropriate risk level. We’ll let you know what you are invested in and how your investments are performing, and you'll always have transparency over ESG scores.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance. We do not provide investment advice in this article. Always do your own research.