Who wants to buy shares in a company which makes landmines, sells tobacco or damages the environment? Very few people, if opinion polls are to be believed. They show most of us would like to see our investments run on ethical and environmental principles. But far fewer - barely a fifth - realise that there is an ethical investment option.
In fact, the growth of ethical and environmental funds has been nothing short of spectacular since Friends Provident, the insurance company, launched Britain's first ethical unit trust, the Stewardship Fund, in 1984.
With pounds 1bn under management in five ethical funds, Friends still leads the field. But there are now over 30 ethical unit and investment trusts to choose from. In January, these funds managed a total of pounds 1.8bn, growing at a rate of 34 per cent each year, compared with just 17 per cent from all other unit and investment trusts.
The range of financial products with an ethical content has also broadened, including not only unit and investment trusts but also personal equity plans (PEPs), personal pensions and mortgage endowments.
The number of charities and local authorities managing funds on ethical guidelines is also significant: charities alone invest over pounds 10bn this way. A growing number of local authority pension schemes also "screen" potential investments according to ethical criteria.
Tessa Tennant, head of research at NPI's Global Care Fund, thinks: "Ethical investment is becoming mainstream, no longer seen as cranky, or bad for your pocket."
Acting against environmental principles can cost companies and investors in them very dear, as Richard Singleton, a fund manager at Stewardship, points out: "Take pollution. Messy industries are now having to clean up after themselves, in many cases decades after they made money from a polluting process.
"There is long-term benefit both in environmental terms and for shareholders if a company can anticipate future regulatory changes on matters like pollution and build these into current operations. This may cost a little more now, but saves money later."
But how do we assess the ethical standards of a company? The Ethical Investment and Research Service (Eiris), a charity which surveys more than 1,100 UK companies and Europe's largest 500 companies, measures their business activities against a wide range of ethical criteria. Providing an investment selection service both to private investors and fund managers, Eiris has come up with a combination of both "negative" and "positive" criteria to determine how companies make the grade.
Karen Eldridge, who works at Eiris, explains: "There's no exact definition of an ethical fund, except that ethical considerations influence investment choice. Negative criteria amount to the avoidance of companies whose activities compromise the investor's ethical concerns. Positive criteria depend on identifying specific business activities which an investor wishes to support."
The positive and negative criteria used by Eiris serve as a benchmark for ethical fund managers and are widely used to provide investment screening.
But according to Mr Singleton at Friends Provident: "Screening can hide companies with good intentions, simply because they are currently caught up in unapproved activities. Again, pollution is a case in point. Very few of the companies we invest in can claim to leave no pollution.
"The point is to find a management team who admit they have a problem but want to sort it out. By offering our support, we give them a positive reason to do so."
He points to one of Stewardship's current investments - the Go-Ahead Group, as a case in point. Operating both bus and train services, the company is committed to buying a new generation of urban buses which have fewer gas emissions. "This will cost more now but, in five or 10 years, I would expect them to be a preferred supplier of bus services in some inner cities," thinks Mr Singleton.
Examples like this underline the way that ethical funds can differ. Some rely on "screening" both to avoid and select given shares, others have in-house research teams and take a more active approach to reforming the way companies work.
One of the first steps in making ethical investments is to decide which set of business activities you wish to avoid and which you want to invest into. Doing some homework will help you find the fund that most closely matches your ethical concerns.
Eiris's reference guide Money & Ethics assesses the main ethical funds in terms of both positive and negative criteria. But ethical providers will also supply free copies of their annual reports and prospectuses, which should detail both their investment philosophy and specific share holdings.
To order copies of 'Money & Ethics', contact Eiris on 0171-735 1351.
'The Independent' has produced a free, 28-page 'Guide to Ethical Finances', written by Nic Cicutti, the paper's personal finance editor, and sponsored by Friends Provident. Call 0800 214487 or fill in the coupon on page 4.
What funds avoid:
Health and safety breaches
Human rights abuses
Military involvement, MoD contracts
Roads and transport policy
Third World concerns
What funds support:
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