If it says 'ethical' on the label, that doesn't mean it's whiter than white

Some funds are more exacting than others in the sectors they screen out on behalf of 'clean' investors. Danielle Levy reports

When the Archbishop of Canterbury was embarrassed by the revelation earlier this year that the Church had invested indirectly in Wonga – after he had announced plans to take on the payday lender – it served as a bleak reminder that even the best-intentioned investor can be let down by their so-called ethical investments.

If you are looking to put your spare cash to good use by investing "ethically", be warned that you could face similar nasty surprises unless you keep a keen eye on the investment criteria. A close examination of the ethical fund sector shows investments in some unexpected areas. They include oil companies operating in tar sand fields, deemed harmful by some environmentalists; arms manufacturers; and businesses that have exposure to fur and animal testing.

John Ditchfield of Barchester Green Investment, a specialist adviser, says funds may not always set the bar as high as investors would like in screening which companies are acceptable: "According to the threshold screening process, if an arms manufacturer only made up a small amount of the underlying business activity of a company, then that could be viewed as insignificant. Our view is investors don't see it that way. If an investor wants to avoid arms manufacturers, they want to avoid it entirely."

So how can potential investors avoid getting caught out? First, be clear about your ethical aims and priorities. This will have a bearing on the strategy you follow.

National Ethical Investment Week, which kicks off today, highlights the diverse range of strategies on offer. "There is no one set of rules for this. The whole point is to provide a variety of different options in the market so people can have their needs met in different ways," says Stephen Hine of Eiris, which produces research on the ethical, environmental and social policies of companies.

The Investment Management Association, a trade body, currently counts 51 funds that invest with an ethical bias. They apply "negative screening" to potential investments and typically exclude alcohol, tobacco, gambling and defence. However, as Mr Ditchfield says, fund managers may be given a degree of flexibility with exclusions. He recommends Kames Capital as a provider that is rigorous in the way it negatively screens stocks.

Mr Hine adds: "If you are adamant that you don't want to invest in tar sands, for example, you would be better off in a fund that does not invest in fossil fuel at all. It is a matter of doing your homework."

Christine Berry of ShareAction, a charity that promotes socially responsible investment (SRI), urges ethical funds to be open with investors: "I would say be transparent about your criteria, so consumers don't get a nasty shock when they see the investment."

SRI funds take a distinctive approach, applying "positive screening" by targeting companies that seek to address green issues such as energy efficiency. Mr Ditchfield recommends the Wheb Sustainability fund in this sub-sector, alongside the Cheviot Climate Assets fund.

Ms Berry says investors interested in the sector should pay due attention to whether the fund has a robust governance structure in place to monitor underlying investments and ensure engagement with investors. "It is probably something consumers don't think about, but it can tell you a lot about how committed a provider is to ethical criteria," she says.

If you are investing through a financial adviser, Ms Berry adds that it is important to make sure they have relevant expertise and really understand your objectives.

Regardless of the investment criteria or screening process of any ethical fund, she believes that fund managers in the sector must do more to influence the companies they invest in – to get them to raise their game. "There is a perception that ethical investing is just about screening out bad companies. One thing all ethical funds can do is to engage with companies to improve their ethical performance. The industry is only just catching up with that."

In the same way consumers now buy fair trade coffee as part of day-to-day life, some expect that demand for applying similar principles to savings and investments will spur further growth in the sector. Eiris estimates that around £12.1bn is currently invested in ethical funds in the UK, having grown by just over £1bn over the past 12 months. Although Mr Hine anticipates further growth, he suggests that fund managers could do better in the way they promote their strategies to consumers. "The area has grown considerably and there is huge potential for future growth, but lots of people find it hard to find out about these funds."

Ms Berry, meanwhile, questions whether the sector is responding quickly enough to what ethically minded consumers actually want. For instance, ShareAction research suggests that investors are less concerned about negative screening, preferring to focus on issues like improving labour rights, human rights and environmental policies within the companies where they may hold a stake. "I think the whole market has been slightly slow in developing a range of new funds that address these issues," she says.

But if you want to invest ethically, will you lose out in comparison with mainstream funds?

Performance within the sector varies markedly. Some active funds invest in shares in the UK and abroad, others in bonds, while tracker funds tend to invest in a basket of stocks.

Hine says investors have nothing to fear over the longer term. "These funds tend to perform in line with the market over time." Standard Life Investments' UK Ethical fund, which applies positive and negative screening to UK shares, is testimony to this. It is the top performer in the sector over the past three years, having delivered a 58 per cent return versus an average of 46.8 per cent in the equivalent mainstream sector.

However, Mr Ditchfield warns that some ethical equity funds can prove more volatile if they exclude larger, and safer, companies and have more exposure to riskier smaller firms.

Overall, if you want to invest while taking care of your conscience then don't simply plump for a fund because it says ethical. Check its selection criteria or you could end up falling into the same holy mess as the Archbishop of Canterbury.

Danielle Levy is a Citywire reporter

Arts and Entertainment
Neil Young performs on stage at Hyde Park
musicAnd his Hyde Park set has rhyme and reason, writes Nick Hasted
Women have been desperate to possess dimples like Cheryl Cole's
people Cole has secretly married French boyfriend Jean-Bernard Fernandez-Versini after just three months.
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
indybestThe tastiest creations for children’s parties this summer
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Paolo Nutini performs at T in the Park
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Sales Executive - Central London /Home working - £20K-£40K

    £20000 - £40000 per annum: Deerfoot IT Resources Limited: Sales Executive - Ce...

    HR Advisor - 6 months FTC Wimbledon, SW London

    £35000 - £40000 per annum + Benefits: Ashdown Group: HR Advisor - 6 Months Fix...

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Day In a Page

    Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

    Super Mario crushes the Messi dream

    Germany win the 2014 World Cup in Brazil
    Saharan remains may be evidence of the first race war, 13,000 years ago

    The first race war, 13,000 years ago?

    Saharan remains may be evidence of oldest large-scale armed conflict
    Scientists find early warning system for Alzheimer’s

    Scientists find early warning system for Alzheimer’s

    Researchers hope eye tests can spot ‘biomarkers’ of the disease
    Sex, controversy and schoolgirl schtick

    Meet Japan's AKB48

    Pop, sex and schoolgirl schtick make for controversial success
    In pictures: Breathtaking results of this weekend's 'supermoon'

    Weekend's 'supermoon' in pictures

    The moon appeared bigger and brighter at the weekend
    Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

    How Saudi Arabia helped Isis take over northern Iraq

    A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
    The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

    The evolution of Andy Serkis

    First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
    You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

    You thought 'Benefits Street' was controversial...

    Follow-up documentary 'Immigrant Street' has got locals worried
    Refugee children from Central America let down by Washington's high ideals

    Refugee children let down by Washington's high ideals

    Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
    Children's books are too white, says Laureate

    Children's books are too white, says Laureate

    Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
    Blackest is the new black: Scientists have developed a material so dark that you can't see it...

    Blackest is the new black

    Scientists have developed a material so dark that you can't see it...
    Matthew Barzun: America's diplomatic dude

    Matthew Barzun: America's diplomatic dude

    The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
    Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

    Meet the 'Quantified Selfers'

    From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
    Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
    Mrs Brown and her boys: are they having a laugh?

    Mrs Brown and her boys: are they having a laugh?

    When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor