Clean up in a good cause

Unit Trusts: How green do your savings grow? It pays to check ethical fund credentials
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The Independent Online
ETHICAL investing wants to go mainstream. You don't need to be a crank and you can achieve good returns without abandonng your principles. That, broadly speaking, is the message from the fund managers of the increasing number of ethical unit trusts. There are now around 20 such funds, whereas 10 years ago there were only two.

Some ethical unit trusts aim to avoid the negative; they don't invest in companies whose activities - armaments, say, nuclear power, animal testing, oppressive regimes, or tobacco and possibly alcohol - are deemed morally questionable. Positive criteria may also apply. Funds aim to invest in companies with, for instance, progressive employment policies, community involvement or a good record on waste disposal. CIS Environ, for example, identifies potential investments using positive criteria relating to activities "considered to improve the quality of life".

Performance figures bear out the suggestion that ethical funds - on average - keep pace with other sectors (see table). However, ethical unit trusts may well invest in a predominance of small- and medium-size companies (big companies with more subsidiaries have more chances to break criteria), which can make the fund performance more volatile.

Large companies may have plenty of opportunity to breach negative criteria, but they don't inevitably do so. Peter Webster of Eiris, a charity providing research to individuals and ethical fund managers, points out that large companies may also score more highly on the positives - "on equal opportunities and environmental systems, for instance, it may be the larger companies which have the resources and the interest to implement them".

Disconcertingly, the top performing ethical trust over one and five years, the Framlington Health Fund (which is also one of the best performing international funds - ethical or non-ethical - over five years), plays down its ethical tag. It doesn't have negative criteria and the search for "solutions for unmet medical needs" leads it to invest in healthcare providers generally, including biotechnology and pharmaceutical companies. Their animal experiments might make the fund unacceptable to some. Anne McMeehan, managing director at Framlington, stresses too that the fund is a specialist one and therefore more risky than a general fund would be.

Other funds can also be quite pragmatic. They might not invest in manufacturers of tobacco products but might also not rule out retailers who sell cigarettes. Would-be investors need to check the purity of the fund's ethical credentials.

Bill Mott, head of unit trusts at Credit Suisse, reckons that only around 40 per cent of the 800-odd companies on the All-Share Index are on the fund's approved investment list. But that still gives quite a lot of companies to choose between.

In general, ethical fund managers argue that ethical management of companies will result in good long-term returns.

Clare Brook, fund manager of NPI Global Care, warms to this theme. For her, the most exciting discovery is a company where "the business case is bound up with the way the legislation is moving and how we are going to live in the future". Her success stories include Celsis, which has developed a means of measuring microbes in food ("I can only see that growing as people get more worried about what's in food"), and Dorling Kindersley ("We like the whole education thing").

Companies and indeed countries move on and off exclusion lists. Investors who once wanted to avoid South Africa may now positively want to see investment there. Eiris, which monitors such things, says its companies' database changes all the time - if use of a particular chemical is phased out, say.

Helping companies to clean up their acts is very much part of the ethical investing spirit. So, now, is taking a pro-actively ethical stance with managements already in supposedly ethical industries. As Mr Mott at Credit Suisse put it: "Nursing homes might qualify by industry, but we want to check that they are run ethically."

If you are tempted by an ethical unit trust:

q Bear in mind that some high-performing stocks are likely to be excluded because they fail to live up to ethical criteria.

q Check the fund's positive and negative criteria and its holdings to make sure that you support them.

q Charges for ethical funds, on average, are a little higher than the average for other funds. It is always worth asking for a discount.

q Eiris (0171-735 1351) can supply a list of financial advisers specialising in ethical investment. One, Ethical Investors Group (01242 604550), donates 50 per cent of its profits to good causes chosen by clients. Another, Holden Meechan (0117 925 2874) produces a guide to ethical and green investment funds, available free.

Ethical/green unit trusts

One-year record Five-year record

Value of pounds 100* Value of pounds 100*

Best performers

Framlington Health 145 Framlington Health 374

Credit Suisse Fellowship 128 CIS Environ 216

Sovereign Ethical 120 FPS North America** 202

NPI Global Care115 Eagle Environ Opps Star 200 Abtrust Ethical112 Acorn Ethical189

Worst performers

Abbey Ethical103 Jupiter Ecology 180

FPS Income** 103 FPS** 178

Acorn Ethical 103 Sovereign Ethical 172

Equitable Ethical 95 Allchurches Amity 162

Clerical Medical Evergreen 91 Clerical Med Evergreen 136

All units trusts 105 All unit trusts 188

* Offer to bid, net income reinvested; as at 23/10/95. **FPS = Friends Provident Stewardship. Source: Micropal

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