Ethical investments on a different planet

All consciences and financial ambitions are catered for as the funds grow and grow. By Paula Hawkins

Ethical investing used to be a simple business. A decade ago, there were just a handful of funds to choose from, and two basic varieties: light and dark green. The first of these categories was stricter, excluding all companies involved in tobacco, the arms trade, gambling, fur and pornography, as well as any firms abusing workers' rights. Light green funds, meanwhile, tended to screen companies positively, including those with a good social, environmental or ethical track record.

But the "green" universe has become much larger, more popular and a great deal more complex. There are now around 100 ethical investment funds in the UK worth a total of £5.6bn – an increase of 32 per cent in the past year alone, with growth driven by investment returns as well as the burgeoning interest in green issues. Over one and three years, ethical funds have outperformed non-ethical ones, and over 10 years the sector has beaten the FTSE 100 hands down, returning just under 98 per cent compared with the blue-chip index's 43 per cent.

As the sector has grown, it has become less easy to divide funds along simple dark and light green lines. "There is now a far greater diversity," says Philippa Gee at financial advice firm Torquil Clark. Many fund managers now combine the traditional screening approach – whereby firms are excluded or included because of their involvement in given activities – with other strategies. Some adopt a "best in class" approach: they will invest in oil stocks but seek out those companies that are trying to limit the environmental impact of their activities. Others practise "engagement" – encouraging firms to clean up their act.

The policy of fund managers such as Henderson Global Investors, which runs socially responsible investment (SRI) funds, is becoming more common. "First, we seek out the best global groups for providing solutions to climate change," says George Latham at Henderson. Examples include Solar World, a producer of solar-power technology, and Tanfield, a UK company that makes zero-emission vehicles for commercial use. "We also incorporate climate change into our assessment of companies from across the wider UK market," adds Mr Latham. He cites HSBC, a "carbon- neutral bank", and Scottish & Southern Energy, the UK's biggest generator of renewable energy.

HSBC has also been approved as a company for potential investment by the Stewardship funds, the oldest ethical range in the UK, whose approach is traditionally dark green. Tony Stoller helps set the ethical criteria for the funds and says banking has changed: "In recent years, and in large part due to the growing influence of sustainable investment, many leading banks have come to integrate this into their core lending practices."

While F&C Stewardship Income is the fund of choice for ethical investors looking to draw an income from their portfolio, those looking for investment growth could consider Jupiter Ecology. The screening process is rigorous, with initial research being undertaken by a group of environmental and social scientists, and the final selection being made by fund manager Charlie Thomas. "The SRI team is experienced, the process is strong and Charlie Thomas comes across as a passionate green manager," says Graham Frost at financial adviser Bestinvest.