Research out this week from the Ethical Investment Research Services (Eiris) showed that record numbers of individuals are investing with a conscience: the level of investment into UK ethical retail funds hit £6bn last year. Increasing numbers are taking the moral high ground on a wide range of issues, from weapons development to tobacco production to nuclear energy. You can now even get an environmentally-friendly mortgage.

So what is ethical investment?

Ethical – or socially responsible – investment is influenced by social, environmental or political issues. Ethical funds typically either look for companies that are actively pursuing ways of improving the environment, international relations or the economy, or avoid companies that they consider have a potentially negative effect on the way we live.

What is the background to ethical investment?

It dates back to the 19th century, when religious movements such as the Quakers and Methodists voiced concerns over issues such as fair employment. At the turn of the 20th century, the Methodist Church began investing in the stock market, but avoided companies involved in alcohol and gambling.

The first ethical fund – the Pax World Fund – was set up in the US in 1971 as a stance against the Vietnam War. In the 1980s the apartheid regime in South Africa accelerated the promotion of ethical investment. Eiris formed in 1993 to provide independent research for ethical investors and the UK’s first ethically-screened unit trust – Friends Provident’s Stewardship Fund – was launched in 1984.

What types of funds are there now?

The range of funds has grown enormously over the past decade. There are currently 75 ethical funds in the UK, and three more are to be launched this summer. Some funds avoid companies that, say, manufacture weapons, develop nuclear power stations or produce cigarettes and alcohol. Others invest in companies that are actively looking to better the environment by developing renewable energy techniques, recycling or helping poorer economies. There are also funds that invest in “vegan” companies, which avoid anything to do with meat or meat products.

How do funds screen the companies they invest in?

Most funds have their own ethical committees to decide the criteria. The fund’s objectives are usually set at launch and do not vary. Some committees have the power to veto every stock, while others will take a more advisory role.

There are different levels of screening. A “positive” approach means that the fund manager will only invest in companies that are actively working to improve the world in some way. These invest in the so-called “industries of the future”. “Negative” screening excludes those companies that are deemed to have a bad influence on the environment, or on our health. The strictest funds in terms of excluding “bad” companies have “dark green” strategies. “Light green” funds may invest in some of the companies that are considered harmful, but only if the company is willing to engage in talks to bring about positive change.

How popular is ethical investing?

Since 1997 the amount invested ethically has grown from £1.5bn to £6.1bn. There are now around 500,000 accounts in ethical funds, up from around 137,000 in 1997. Eiris says anti-military investment is currently popular, as people vent their opposition to the war in Iraq.

Why has it become such a big deal?

People are becoming more aware of the environment and are starting to realise the impact their investments can have. There is an increasing desire among investors to make their funds do some good as well as generate returns.

What kind of performance have these funds seen?

As with all funds, the performance of ethical investments has varied greatly. Their performance depends on the areas of investment and the skill of the fund manager. Over the past year the top performers have been the Aegon Ethical Equity fund, which has generated a return of 26 per cent, the Jupiter Ecology Fund, with 25 per cent, and the Standard Life UK Ethical fund, with 24 per cent. The worst performers have been the Rathbone Ethical Bond Fund, with a negative return of 0.04 per cent and the SW Global SRI fund with an 8.2 per cent return.

How do I choose a fund?

On Eiris’ website,, there is good information about ethical investing and a directory of the financial advisers that are well versed on ethical investment.

Later this year Eiris is launching an ethical fund selector, which will detail the different approaches taken by fund managers.

The FTSE4Good Index can also be useful as a guide to ethically-aware companies. The index excludes controversial companies such as nuclear developers. It measures the performance of companies that meet globally-recognised responsibility standards, and aims to facilitate investment in them. You can take out a tracker fund that follows this index, and will give you exposure to socially-responsible companies. But FTSE4Good has been criticised for not imposing stricter criteria on some companies’ environmental records.

Anything else to bear in mind?

Ethical funds will not suit everyone and it is wise to have a clear idea of your objectives before you start looking for a fund. Make sure you find a fund that matches your principles, and check the experience of the fund manager and the costs.

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