They base their investment strategies on both positive and negative criteria. Positive means actively searching out companies which do something considered "good", such as supplying the necessities of life - bread, water and clothing. Negative means avoiding companies involved in "bad" activities, such as gambling or the arms trade.
For those who want an ethical investment, the first step is to decide what issues are important to you, then choose a fund which best approximates your values. The problem here is that the commitment of companies towards some social goal can vary, not only in whether or not they support a particular policy, but the degree to which they do so.
For example, the TSB Environmental Investor Fund is a "green fund" and, among many other considerations, will back companies which achieve a reduction in fuel bills by energy conservation. Yet the TSB fund will only avoid investing in UK companies which have contracts with the Ministry of Defence of more than pounds 250m over three years. By contrast, Friends Provident's Stewardship trust has a pounds 5m limit over three years on MoD contracts.
Ethical investors often assume they will have to accept a lower return as the price of listening to their conscience. In fact, ethical trusts have slightly out-performed the UK sector as a whole, over both the past one year and the past five years. A sum of pounds 1,000 invested in the average ethical trust five years ago would now be worth pounds 1,464, against just pounds 1,409 for the average UK unit trust.
All equity unit trusts have been hit by stockmarket falls in the last few weeks, but ethical funds have suffered less than most. The one-year returns for a pounds 1,000 investment are pounds 986 for the average ethical trusts and pounds 949 for the average UK trusts.