A recent polemic by the right-wing Social Affairs Unit attacked ethical investments as having "little to do with serious ethics and much more to do with fashionable causes and political correctness".
"Bloody nonsense," retorts Giles Chitty of independent adviser Barchester Green Investment. "Fighters made by British Aerospace are being used to attack civilians in Indonesia. The question one needs to ask - regardless of political correctness - is whether everyone wants to invest in companies that sell arms to oppressive regimes, or in companies that test cosmetics on animals."
The row comes at a time when ethical and environmental investments - those that avoid shares in companies involved in certain industries such as arms or tobacco or industries that are environmentally damaging - are enjoying something of a renaissance.
Interest in green or ethical issues waned during the recession but now appears to be picking up. The amount invested in ethical unit trusts, for example, has almost tripled in size in less than three years, according to a report last month by the independent ethical investment research company, Eiris.
Other surveys also reflect a renewed enthusiasm for going green, although this is not mirrored in what people do with their money in practice. For example, while a survey last year found that six out of 10 people agreed with the statement: "I would rather invest in an ethical unit trust than in any other sort of unit trust," just 1 per cent of investment funds fall into this category and investors still overwhelmingly choose non- ethical funds.
This reluctance may be due in part to lack of awareness of ethical investments and partly to doubts about the investments themselves.
Critics argue that restricting the number and type of companies a fund has available to invest in will inevitably harm its investment performance.
But the evidence suggests that the link between ethics and performance is much less clear-cut. The average performance of these trusts, as the table shows, is not to be sniffed at - better than the average performance of all unit trusts over the past year and the past five years, and on a par with the returns from the stock market. These averages, however, do mask a wide range of individual returns. Some funds, such as Framlington Health, which profited handsomely from last year's surge in US biotechnology stocks, have done extremely well for investors. Others, such as Clerical Medical Evergreen, have turned in fairly dire performances.
One reason that the sector is such a mixed bag is that the returns from ethical funds tend to be fairly volatile since their selection criteria rule out many of the big blue-chip multinationals that tend to give stable returns.
The Friends Provident Stewardship trust, for example, which is the oldest and much the biggest ethical fund, can invest in just 15 out of the UK's 100 biggest companies. Similarly, the international Jupiter Ecology fund, which has one of the strictest set of criteria of all the funds, has a choice of only around 400 companies worldwide, compared with a possible pool for non-ethical trusts of 18,000 companies in the US alone.
Ethical funds have a particular problem with getting international exposure since their criteria rule out many of the fast-growing emerging markets - developing countries in regions such as South-east Asia.
Another negative factor is that charges on ethical funds tend to be fairly steep compared with those on non-ethical funds, partly reflecting the extra cost of screening the investments.
Some ethical investment fans believe that the future performance of this sector could actually be very good. "The more environmentally aware companies tend to be better managed, because they're taking a pro-active approach," argues Simon Baker, who manages the Jupiter Ecology fund.
And performance may not be all that matters. "Most ethical investors are not looking for the best possible return in the market, just for above average returns," says Pat Meehan of independent adviser Holden Meehan.
Less than brilliant performance, however, may not the only drawback to investing ethically. The other main charge levied by critics of the sector is that the criteria used to define "ethical investment" can be confused and inconsistent.
The Social Affairs Unit report, for example, argues that: "Ethics is about careful judgements on what people do with products; not a simplistic division of products into good and bad." Further, it states, if certain products are unethical then why not also ban all companies associated with them, such as the banks that lend to them?
While advocates of ethical investment would argue that this all-or-nothing approach is itself flawed and simplistic, it does highlight the difficulty in setting ethical criteria. "The cut-off point [the point at which you decide to avoid a company] is a very real and live issue," says Tessa Tennant, head of ethical research at fund manager NPI. "Some funds are more pragmatic than others in terms of what they will and will not accept."
Most ethical funds avoid a core list of "sin stocks". This list, which reflects the movement's religious roots as well as more recent concerns, will typically ban investment in companies involved in tobacco, alcohol, pornography, gambling, arms production, nuclear power or vivisection, or those with interests in oppressive regimes.
Funds generally apply a positive screen, encouraging investment in companies that aim to improve the environment or provide services of long-term benefit to the community.
There can be a distinction between green funds - that are simply looking at environmental issues - and ethical ones, with wider concerns. As the table shows, criteria and levels of screening do vary significantly. Investors need to check the fund's policy carefully. Some funds may avoid companies that manufacture cigarettes but not those that sell or distribute them. Some ban animal testing altogether while others, such as Framlington's Health Fund, invest in pharmaceutical companies that are legally required to test new drugs on animals.
How well funds check that the investments they make do actually match up to their published criteria also varies. "There are a lot of `me too' funds jumping on the bandwagon by slapping on a green label without doing the necessary research into companies," warns Mr Chitty.
q Holden Meehan (0171-404 6442) provides a free guide to ethical investments. PEP specialist Allenbridge (0171-409 1111) issues a free guide that ranks ethical PEPs on their performance, and Barchester Green Investment (01722 331241) offers a free guide to choosing ethical investments.
Another useful source of information is Eiris (0171-735 1351), which many ethical funds employ to screen investments on their behalf. A yearly subscription to its quarterly newsletter costs pounds 12.
Jean Eaglesham works for `Investors Chronicle'.
How does your fund compare?
Ethical & environmental Value of pounds 100* after Ethical Environmental unit trusts 1 year 5 years rating** rating**
Abbey Ethical 119 174 4 3
Abtrust Ethical 124 n/a 3 2
Acorn Ethical 114 175 3 1
Allchurches Amity 119 153 4 3
CIS Environmental 118 196 2 2
Clerical Med Evergreen 106 137 4 5
Credit Suisse Fellowship 141 198 4 n/a
Eagle Star Environ Opps 117 182 n/a 3
Framlington Health 198 396 2 3
Friends Prov Stewardship 126 188 5 3
Friends Prov Stewardship Income 114 176 5 3
Friends Prov Stewardship N American 124 198 5 3
HTR Ethical 121 n/a 5 4
Jupiter Ecology 126 192 5 5
NPI Global Care 125 n/a 5 5
Scot Equitable Ethical 125 173 5 n/a
Sovereign Ethical 139 171 3 2
TSB Environmental Investor 117 165 n/a 3
Average ethical/environmental unit trust 125 190
Average all unit trusts 118 177
FT-SE 100 index (UK blue chip shares) 123 156
FT-SE-A All-Share (UK stockmarket) 128 190
* The value is shown offer to bid (ie net of charges) with after-tax income reinvested.
** Ratings by independent financial advisers Holden Meehan. A copy of the guide containing these ratings is available free from Holden Meehan (0117 925 2874 or 0171 404 6442) Marks out of five
Figures correct as at 11.3.96. Source for performance data: Micropal