Investing your Isa money in companies that are helping the world become a better place is a strategy to consider this year.

Environmental, social and governance (ESG) investing is when you back businesses that are dedicated to good practices in these areas. Essentially it means that firms ensure they look after the planet and their people and run their company properly.

For this tax year some 41 per cent of UK investors said they have previously invested or planned to invest in ESG funds, according to the investment platform Nutmeg.

Looking globally, Bloomberg Intelligence data shows that ESG assets surpassed $30 trillion in 2022, and are projected to exceed $40 trillion by 2030.

Jake Moeller from the research firm Square Mile said: “Strong ESG credentials offer investors a ready-made indication that a company is being well run.

“This is intuitive — companies that provide a safe, respectful work environment face lower staff turnover costs. Mining firms that engage with indigenous communities are less likely to face expensive litigation. Boards with cognitive diversity are better at identifying and addressing corporate challenges. Businesses that avoid slave labour in their supply chains reduce reputational risks. Companies that mitigate flood risk for their warehouses reduce insurance costs. All these factors help to protect or enhance shareholder value.

“Companies that neglect ESG criteria risk reputational and financial loss in competitive markets.”

References to “responsible” and “sustainable” investing are often used in the same breath as ESG. The terminology can be confusing, so it is important to read what a fund is aiming to achieve before investing, to check that it aligns with your values.

Some funds and trusts, for example, are specifically geared towards an environmental goal, such as an acceptable carbon footprint. Others are broader in their approach and simply invest in companies that adhere to ESG considerations.

Ethical investing is a different approach, and usually means completely avoiding harmful sectors such as tobacco, arms, gambling and fossil fuels. This is known as negative screening, where those associated with these practices are removed from a portfolio.

There are benefits in having responsible investments in your Isa. For example, it helps to drive positive change because shareholders have a vote on certain aspects of how the business is run. And if you invest in a fund (rather than direct shares), your cash gives ESG and responsible fund managers the power, as a large shareholder, to become a bigger influencer. They can use their clout to put company bosses under pressure to improve or correct behaviour.

Responsible investing is not always plain sailing, said Moeller, and the market does not always punish poor ESG behaviour. “So when for example, commodity prices rally, a bad mining company may profit as much as a well-behaved one, and a fund manager who avoids mining companies altogether may underperform.

“But the market generally identifies durability. Doing good and avoiding harm in the longer term is good for business, and good for returns.”

Olivia Bowen from the ethical financial advice firm Castlefield said: “It’s common sense that companies providing solutions to the world’s problems will tend to do well over time, if they are well managed.

“Often these companies are in growth stages of development, meaning they are typically more sensitive to economic factors than defensive stocks. So, in times of rising interest rates they will underperform, but in times of economic growth they will typically outperform.”

You can select individual companies to buy shares in, which means doing some digging to find out which ones are as responsible as you want them to be.

Alternatively, there are oodles of funds and investment trusts to choose from. Finding the one that appeals to you might be more straightforward thanks to a new labelling system launched in December by the Financial Conduct Authority, the City regulator. The labels are Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals, and should help investors better understand the fund’s strategy.

Investment firms can choose to use any of these labels if their funds meet the criteria, but they are not compulsory.

With or without these labels it’s still important to look under the bonnet of a fund and understand exactly how a manager invests. Check the factsheet, which holds information on the companies it invests in, its objectives and how the fund is run.

Some investment platforms provide information and fund lists to help narrow down the options. For example, Interactive Investor, the UK’s second largest investment platform, has a list dedicated to best-in-class list of funds, ETFs and investment trusts — the “ACE 40”.

Lisa Stanley from the financial advice website Good with Money rates two investment platforms in particular for those seeking responsible investment choices. “We like Simply EQ (EQ Investors) for its breadth of choice and The Big Exchange for impact and its low investment charges,” she said.

EQ Investors has a Good With Money “Good Egg” kitemark for companies that can show they make a positive impact by improving the lives of customers and benefiting society and the environment.

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Some platforms offer oven-ready packages that invest your money in sustainable funds. For example, at Nutmeg, there is an ESG score for each portfolio from 0-10, where a higher score signifies better adherence to responsible measures.

For those who prefer to select their own funds, Moeller suggests Royal London Sustainable Leaders Trust,which invests in firms that have a positive benefit on society and/or the environment, including the energy management firm Schneider Electric and the pharmaceutical giant AstraZeneca. The fund has returned more than 40 per cent in five years.

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He also likes Ninety One Global Environment, which invests in companies globally that have a positive impact on the environment by helping to reduce the causes of climate change. One of its biggest holdings is the US energy supplier Nextera Energy. The fund has returned about 43 per cent in five years.

Bowen suggested the Impax Environmental Markets fund, which invests in fast-growing companies providing solutions to environmental challenges. Its biggest holdings include the North American waste management services firm Clean Harbors and the Australian logistics company Brambles. The fund has returned about 14 per cent over five years.