Page last updated at 14:42 GMT, Tuesday, 22 April 2008 15:42 UK

Understanding ethical investment

Money Talk
By David Elms
Chief executive,

David Elms

The number of people choosing to combine profits with principles is rising, with investment in "green" funds reaching 8 billion by the end of 2007.

Ten years ago just 1.5 billion was put into environmental funds or those considered to be "socially responsible", according to Ethical Investment Research Services (Eiris).

But growing concerns about global warming and carbon footprints is prompting investors to become increasingly ethically minded and eco-conscious.

Ethical funds typically invest their cash in socially responsible businesses, staying away from the arms trade or tobacco companies.

They may choose, for example, renewable energy companies or organic food producers.

Friends Provident pioneered ethical investing in 1984, and its Stewardship fund, which is now managed by F&C Asset Management, was the UK's first ethical fund.

The ethical investment market has been booming in recent years, and there are now almost 100 "green" funds available to UK investors, with 10 new ones launched last year alone.

Making money with a clear conscience?

Contrary to popular belief, many ethical funds deliver impressive returns.

You need to know what your ethical priorities are and how green you want to go

Investors tend to believe they will not make as much profit by steering clear of certain unethical sectors, such as tobacco and arms.

Yet a recent survey by analyst Moneyfacts proves that you can make money by sticking to your principles.

It found that many ethical investment funds are producing better returns over one-and three-year periods than their traditional counterparts.

Please remember that past performance is no guarantee of future performance.

There are many funds to choose from, which use different methods to put themselves into the "green" category.

So, before deciding where to put your money, you need to know what your ethical priorities are and how green you want to go.

While some funds won't invest in armaments, or tobacco, others take a 'lighter' green approach and may invest in controversial sectors such as the oil industry, if the company is making best efforts to be ecological and are trying to benefit society.

Different strategies

There are three methods used by investment companies to classify their ethical funds.

Negative practices may include bad employment conditions, poor health and safety records, and poor pollution records

While some combine a mixture of these tools, others only use one.

Some funds actively screen out companies that are involved in practices deemed to be unethical.

This is called "negative screening" and these funds are considered to be the greenest of all, being "dark green" such as the Jupiter Ecology fund.

Industries typically subject to negative screening include the oil industry, the arms industry, the logging and mining industries, and the pornography industry.

Negative practices may include bad employment conditions, poor health and safety records, and poor pollution records.

Another method is "positive screening", when funds search for companies that are working to help the environment, such as sustainable energy or recycling companies.

Funds which employ positive screening are referred to as "light green" funds because they might include companies with a less-than-perfect record.

Yet some may say they are more effective than the dark green funds because they give companies an incentive to review and change their practice.

The final method used is "engagement".

These funds use their manager's shareholder status to push for changes in the way a company deals with human rights, the environment and corporate governance issues to influence it to do good.

Dig deep

It is worth checking exactly where your money is going.

Some popular ethical funds may leave some investors shocked at the shares they hold.

For example, the 1 billion F&C Stewardship Growth fund, the largest UK ethical fund, has holdings in Tesco - which has attracted protests over its treatment of labour in developing countries - and oil extractor Cairn Energy.

But if you dig deeper there are good reasons why these stocks are held in a ethical fund.

The Jupiter Ecology Fund, the first authorised green unit trust which is over 20 years old, invests around six key green investment themes and then invests globally in companies that can demonstrate positive growth as well as sound environmental and social principles.

Ethical funds launched this year include Marks & Spencer Money's Ethical Fund and Standard Life's European Equity Ethical fund.

The former avoids investing in companies that have a poor environmental record or are primarily involved in armaments, gambling, the fur trade, tobacco and pornography.

The latter is investing in European businesses that meet Standard Life's ethical criteria, especially those that are making efforts to preserve the environment or improve the quality of human life.

How can you research ethical funds?

When researching which funds are suitable for your needs, check the investment company's website and consider consulting an independent financial adviser (IFA).

There are also various organisations which can help you make an informed choice such as Eiris or the World Trade Organisation.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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