Do-gooders do nicely

Ethical funds can offer the shrewd investor guilt-free profits.

Making money while doing good sounds like a standard plank in New Labour's manifesto. When it comes to investment, however, things are not quite so simple, and sifting through company accounts to decipher whether or not a particular blue chip is guilty of exploiting Third World labour or is party to the production of greenhouse gases is likely to prove a complicated and time-consuming task.

According to a survey by Friends Provident, out of a total UK unit trust industry worth pounds 120bn, only around pounds lbn is invested in ethical funds. Lee Coates, director of the financial advisers Ethical Investment, has no doubt as to the reason: "It is the insurance industry which is most to blame." he says. "With the exception of Abbey Life, which has its own ethical fund, most direct-sales forces have no ethical products to sell."

He also worries that many independent financial advisers (IFAs) have insufficient product knowledge. "What we have discovered from our own clients is that many IFAs simply don't ask potential investors whether they are interested in ethical investment. It's not that their commissions are any less, it is just that many are unaware of the products on offer."

There is perhaps another reason why, in the caring, sharing 1990s, ethical funds have not achieved a greater share of the market and that is the widely held belief that such funds underperform. Such a belief is seriously misguided.

Performance figures for all UK equity pension funds over the last year show that ethical funds take seventh, ninth and 11th spots; there are only six ethical funds in the sector and all are in the top 31 out of a total of 210 funds. A similar picture emerges in the UK equity growth sector over the past 12 months. Credit Suisse's Fellowship Trust ranks fifth out of 165 funds and the worst performing ethical fund is in 26th place.

Given the relatively small number of funds that describe themselves as ethical - there are around 27 unit trusts and three investment trusts - these are extraordinary figures. So what lies behind the success?

One reason is that ethical funds are severely restricted in the number of companies they may invest in. Although most funds will retain some blue chip "leaders", the vast majority of FT-SE 100 companies will be out of bounds. Multinationals are usually so diversified that the chances of them breaching at least one of the investment restrictions set down by the ethical funds' trustees are that much greater. ICI, BP and Shell will not feature on any ethical funds' buy lists because of their questionable pollution records.

Such restrictions appear, however, to help rather than hinder performance. "In many ways, having less stocks to choose from makes life a lot easier," says Richard Lowman, fund director at Friends Provident's Stewardship Trust, the oldest and largest ethical fund. "We can focus our attention on fewer companies and get to know the board a lot better."

Another reason put forward to explain the recent outperformance is that by investing in companies which already have paid the price of putting green policies in place, they are buying nearer the bottom of the market.

Stewart Morgan, of the independent financial advisers Chase de Vere, has undertaken research into ethical funds and believes there is a case for ethical investment even for those who might not see themselves as necessarily "ethical" investors. "I would not advise anyone to invest all their money into ethical funds. However, in a diversified portfolio, there is a case for investing in ethical funds from a purely financial viewpoint."

The investment policies of the various ethical funds differ greatly. Anecdotal evidence suggests that many investors buy into ethical funds believing they are doing their bit for the environment when in fact the fund may be more concerned with avoiding investment in companies involved with gambling or the sale of alcohol. As Mr Morgan explains: "The moment a client tells me what they don't want to invest in, that usually knocks out 80 per cent of the choice anyway."

The Ethical Investment Research Service (EIRIS), which helps ethical fund managers to decide which companies are acceptable investments, produces a guide, "Money & Ethics", which lists all ethical investment plans currently available along with detailed information about the investment policies of each of the funds. Sensitive investment areas are divided into 24 categories. These range from intensive farming and pesticide production to pornography and nuclear power.

Chase de Vere (0800 526 091), Ethical Investors (01242 604550), 'Money & Ethics' is available from EIRIS, Bondway Business Centre, 71 Bondway, London SW8 1SQ, price pounds 12.50.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

General Election 2015: Vote for the party that will boost your finances

Experts warn that the general election is unlikely to lead to stable markets. Simon Read talks to two investment managers who are advising caution

Make the most of your money in 2015-16: The end of the tax year is the beginning of the next...

The new tax year brings with it a raft of new rules and regulations
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Recruitment Genius: Online Customer Service Administrator

    £16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

    Recruitment Genius: Digital Marketing Executive

    £18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

    Day In a Page

    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
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    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