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

game of thrones reviewWarning: spoilers

Arts and Entertainment
The original Star Wars trio of Harrison Ford, Carrie Fisher and Mark Hamill

George Osborne confirms Star Wars 8 will film at Pinewood Studios in time for 4 May


Arts and Entertainment
Haunted looks: Matthew Macfadyen and Timothy Spall star in ‘The Enfield Haunting’

North London meets The Exorcist in eerie suburban drama


Arts and Entertainment

Filming to begin on two new series due to be aired on Dave from next year


Arts and Entertainment
Kit Harington plays MI5 agent Will Holloway in Spooks: The Greater Good

'You can't count on anyone making it out alive'film
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating

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

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before