Midweek Money: Money and morality

Beginning a series on ethical finances, Iain Morse looks at how to invest with a clear conscience

Does anyone really want to buy shares in a company that destroys rainforests, makes landmines, or helps prop up an undemocratic regime? Opinion polls suggest not. Most of us would like to see our investments run on ethical and environmental principles.

Far fewer of us - barely a fifth - realise that there is an ethical investment option, with a wide enough range of products currently available to cover most of our requirements. These products range from PEP-able unit and investment trusts, through personal pensions, to endowment savings plans that can be used to pay off a mortgage.

The growth of the ethical sector has also been rapid, with more than pounds 2.2bn under management in unit and investment trusts alone. The largest of these funds, Friends Provident's Stewardship unit trust, controls assets worth more than pounds 670m. Charities and a growing number of local authority and trade union pension schemes use ethical or environmental criteria to "screen" potential investments. Charities alone currently invest more than pounds 10bn in this way.

Tessa Tennant, head of research at NPI's Global Care Fund, says: "Ethical investment is no longer seen as cranky or bad for your pocket. It has entered the mainstream."

So how do ethical funds differ from the non-ethical? They use negative and positive screens to avoid and select certain areas of investment. For instance, the Stewardship fund avoids animal testing and the production and sale of alcohol, and applies no fewer than nine negative screens.

But critics argue that using negative criteria achieves little in terms of changing the practice of those companies whose shares are not bought by ethical fund-managers. Much here depends on the use of positive screening, and a new style of pro-active shareholding, with fund managers trying to bring about changes in policy among the company managements they deal with.

While some funds, such as Scottish Equitable's Ethical unit trust, have no positive screening, longer-established ones like the Stewardship or NPI's Global Care unit trust, promote change in this way.

If you want not just to avoid certain business areas but also to support others, then the positive screens used by a fund may be as important as the negative ones when you make a choice between them. Look also at the types of contact maintained between your ethical fund manager and the companies they invest in. As an example, Aberdeen Prolific's Ethical unit trust uses eight negative screens, but only two positive ones, and does not talk to company management on ethical issues. By comparison, the Stewardship fund has eight positive screens, carries out its own ethical research, talks to companies on ethical issues and makes on-site visits.

This shows how much these funds can differ, but the use of negative and positive criteria does give them one feature in common: they hold a higher percentage of shares in small to medium-sized companies, and a smaller percentage in large companies, than their non-ethical equivalents.

Understanding how this can effect fund performance is important if you decide to choose an ethical investment. Shares in small companies are inherently more volatile than those of large ones.

For instance, about 70 per cent of the daily value of all shares traded on the London Stock Exchange are in the 100 largest firms. Yet because of negative screening, most ethical funds will invest in no more than 20 or 30 of these. This means that if you invest in an ethical fund, you should be doing so over at least the medium term - say, five years - and not expect short-term gains. This is not just because of the size of the companies, but also their type of business. Many are providers of goods or services in areas ranging from protection of the environment to public transport, and from energy efficiency to recycling consumer waste.

Richard Singleton, of Friends Provident, argues: "Very often we are helping to develop the industries of the future. Take pollution. There is a long- term benefit both in environmental terms and for shareholders if a company can anticipate future regulatory changes and build these into current operations. Today we are seeing industries having to clear up after themselves. Surely it would have been less expensive for them to have avoided this in the first place."

Arts and Entertainment
BBC Three was launched a little over five years ago with the slogan: “Three, is a magic number, yes it is.”

BBC Trust agrees to axe channel from TV in favour of digital move

TV
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer

film
Arts and Entertainment

books
Arts and Entertainment
Armie Hammer in the new film of ‘The Lone Ranger’

TV
Arts and Entertainment

festivals
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

ebooks
Arts and Entertainment
Buying a stairway to Hubbard: the Scientology centre in Los Angeles
film review Chilling inside views on a secretive church
Arts and Entertainment
Jason Williamson, left, and Andrew Fearn of Sleaford Mods
musicYou are nobody in public life until you have been soundly insulted by Sleaford Mods
Arts and Entertainment
Natalie Dew (Jess) in Bend It Like Beckham The Musical
theatreReview: Bend It Like Beckham hits back of the net on opening night
Arts and Entertainment
The young sea-faring Charles Darwin – seen here in an 1809 portrait – is to be portrayed as an Indiana Jones-style adventurer
film
Arts and Entertainment
The audience aimed thousands of Apple’s product units at Taylor Swift throughout the show
musicReview: On stage her manner is natural, her command of space masterful
Arts and Entertainment
Channel 4 is reviving its Chris Evans-hosted Nineties hit TFI Friday

TV
Arts and Entertainment
Harrison Ford plays Indiana Jones in The Last Crusade (1989)

film
Arts and Entertainment

music
Arts and Entertainment
A Glastonbury reveller hides under an umbrella at the festival last year

Glastonbury
Arts and Entertainment

music
Arts and Entertainment
Miles Morales is to replace Peter Parker as the new Spider-Man

comics
Arts and Entertainment
The sequel to 1993's Jurassic Park, Jurassic World, has stormed into the global record books to score the highest worldwide opening weekend in history.

film
Arts and Entertainment
Odi (Will Tudor)
tvReview: Humans, episode 2
Arts and Entertainment
Can't cope with a Port-A-loo? We've got the solution for you

FestivalsFive ways to avoid the portable toilets

Arts and Entertainment
Some zookeepers have been braver than others in the #jurassiczoo trend

Jurassic WorldThe results are completely brilliant

Arts and Entertainment
An original Miffy illustration
art
Arts and Entertainment
Man of mystery: Ian McKellen as an ageing Sherlock Holmes
film review
Arts and Entertainment
Kitchen set: Yvette Fielding, Patricia Potter, Chesney Hawkes, Sarah Harding and Sheree Murphy
TV review
Arts and Entertainment
Chris Evans has been confirmed as the new host of Top Gear
TV
Arts and Entertainment
Top of the class: Iggy Azalea and the catchy ‘Fancy’
music
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating
    and  

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

    How to stop an asteroid hitting Earth

    Would people cooperate to face a global peril?
    Just one day to find €1.6bn: Greece edges nearer euro exit

    One day to find €1.6bn

    Greece is edging inexorably towards an exit from the euro
    New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

    'Iron Man' augmented reality technology could become reality

    Holographic projections would provide extra information on objects in a person's visual field in real time
    Sugary drinks 'are killing 184,000 adults around the world every year'

    Sugary drinks are killing 184,000 adults around the world every year

    The drinks that should be eliminated from people's diets
    Pride of Place: Historians map out untold LGBT histories of locations throughout UK

    Historians map out untold LGBT histories

    Public are being asked to help improve the map
    Lionel, Patti, Burt and The Who rock Glasto

    Lionel, Patti, Burt and The Who rock Glasto

    This was the year of 24-carat Golden Oldies
    Paris Fashion Week

    Paris Fashion Week

    Thom Browne's scarecrows offer a rare beacon in commercial offerings
    A year of the caliphate:

    Isis, a year of the caliphate

    Who can defeat the so-called 'Islamic State' – and how?
    Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

    Marks and Spencer

    Can a new team of designers put the spark back into the high-street brand?
    'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

    'We haven't invaded France'

    Italy's Prime Minister 'reclaims' Europe's highest peak
    Isis in Kobani: Why we ignore the worst of the massacres

    Why do we ignore the worst of the massacres?

    The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
    7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

    Remembering 7/7 ten years on

    Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
    Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

    They’re here to help

    We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
    Time to lay these myths about the Deep South to rest

    Time to lay these myths about the Deep South to rest

    'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
    What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

    What exactly does 'one' mean?

    Court of Appeal passes judgement on thorny mathematical issue