Ethical funds get green light from investors

Some may dismiss them as a form of PR piety, but green funds now have real muscle.

Saving the world and boosting your savings at the same time sounds an attractive proposition. That is not quite what ethical investment offers, but it allows people to avoid areas which leave them feeling uncomfortable.

Saving the world and boosting your savings at the same time sounds an attractive proposition. That is not quite what ethical investment offers, but it allows people to avoid areas which leave them feeling uncomfortable.

Public attitudes are changing - activists, boycotts and adverse publicity can do far more damage to company profits and profiles than in the past. And there has been an annual 25-30 per cent increase in the sums going into ethical unit trusts and pension funds in the last five years.

Such a climate certainly helps ethical - or "socially responsible" - funds, as the City likes to call them. The ethical market for private investors is worth close on £3bn - and some giant pension funds are also involved. Friends Provident, originally a Quaker firm, holds about half the personal investment, and about 20 other groups are involved including NPI, Eagle Star, Jupiter and CGNU (Norwich Union's new merged incarnation).

So how have these funds done overall? Over the last five years, the average ethical unit trust has turned £1,000 into £1,750, say figures from MoneyFacts (Life and Pensions). That is a mere £17 less than the matching UK Growth Fund. The three-year performance figures give ethical trusts a slight edge. This time they have turned £1,000 into £1,342, against the matching growth fund figure of £1,278.

Ethical trusts all have screening committees - arms, tobacco and alcohol are just some of the standard no-go areas. Others include companies involved in gambling and nuclear power. Managers also try to screen out companies dealing with "oppressive regimes" such as Angola, Burma and China, and groups selling goods produced by Third World child labour.

A central group called EIRIS, Ethical Investment Research Services, identifies companies which may do under one, five or ten per cent in suspect areas. Attitudes also vary on investments. Jupiter's Ecology Fund and NPI's Global Care Trust are at the purist or "dark green" end of the market. Jupiter will only invest in companies whose products are designed to improve - including those involved in recycling, alternative energy and public transport

And the results have been impressive. The Ecology Fund comes in at number three of the 108 general growth trusts in the five-year performance tables to the end of last year, turning £1,000 into £2,260, according to MoneyFacts, and topping the performance charts over 12 months, too.

The lighter green trusts which form the bulk of the market can invest anywhere outside the areas they have excluded. Finally there are the funds with green edges. They may have holdings in an oil company - though the industry is usually labelled a generic polluter by most green funds.

"Companies can end up producing operating guidelines or statements of principle," says Amanda Davidson, of Holden Meehan, independent financial advisers that specialise in this area. "Cynics may dismiss such declarations as all things trite and beautiful. But ethical funds have far more financial muscle than they did. What is more, EIRIS is there to monitor what happens in practice".

The City used to consider ethical investment as virtuous but eccentric, but in the last two or three years, the idea has become far more mainstream.

A survey of Britain's top 500 pension funds found 60 per cent of them claimed they took some account of ethics. It may be no more than public relations piety, but the assets they control are so enormous, that even a slight shift of policy should have an effect.

Funds vary sharply both in the risk levels they present - and in how green their investment policy happens to be. Holden Meehan has produced a free, user-friendly booklet, giving details and breakdowns on different types of fund.

Holden Meehan: 0207-404 6442

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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