Personal Equity Plans: If you can't stand the stench of the bottom line...

MAKING money and having a conscience are usually considered to be conflicting ideals. But an ethical PEP gives you the opportunity to aspire to both. And it also offers you the additional bonus of accumulating wealth without having to pay tax.

Typically, ethical funds will use positive and negative criteria to screen potential stocks. With "positive criteria" managers will actively invest in stocks that display certain ethical attributes and avoid those companies involved in venal activities - for example, polluting the environment - or which operate in countries where the political and civil rights of its people are violated.

On the other hand, companies that promote products and services which benefit the environment or human life will find favour. Some funds are predominantly concerned with environmental issues and are known as environmental or green funds.

If the ethical PEP proposition sounds too good to be true then it probably is to a certain extent. If you are really interested in maximising your returns, ethical investments will preclude you from some of the top-performing sectors. For example, pharmaceuticals are often blacklisted because many of them are involved in animal testing or Third World activities.

Financials are another area usually excluded. This is because it can be hard to know exactly where some financial institutions. invest their money.

You should also be aware that not all ethical funds are the same. Some funds refer to themselves as "light green", which means that they will avoid one or two controversial areas, such as the arms trade or tobacco, but do not exercise their consciences much beyond this.

On the other hand, some fund managers employ teams to scrutinise the companies they are investing in.

A fund's mission statement will set out its ethical criteria and you should read this carefully if you want to be sure that it suits your requirements.

The screening process employed by ethical fund managers obviously limits the choice of companies you can invest in. Large companies, which can be difficult to monitor by virtue of their size, are often excluded. Moreover, smaller companies are often involved in only one industry, one that may particularly appeal to an ethical or environmental fund. Industries favoured by these funds include smaller independent electricity companies and environmental consultancy firms.

This bias towards smaller companies meant that many ethical investments did not perform very well last year.

In 1997, the FT-SE SmallCap index returned a pedestrian 5 per cent whilst the FT-SE 100, the index of the top 100 blue-chip stocks, grew by nearly 25 per cent.

Some pundits believe that this trend will be reversed this year and that it could be boom time for ethical investments. This is based on the assumption that small companies have yet to realise their earnings potential, as well as historical evidence which suggests that such companies outperform in the first year after the peak of an interest rate cycle.

Further reasons supporting the ethical case is that the rigorous screening process used by ethical fund managers means they are able to identify companies that are not only ethical but also well managed and therefore likely to do well.

More than 20 companies offer ethical unit trusts (listed in the table on the right) but not all are PEPable.

If you have already used up your annual general PEP allowance but want to invest in a single-company PEP, you can still take the ethical route. The Ethical Investment Research Service (0171 735 1351) can give you a list of companies that match your personal ethical criteria. This ethical analyst is used by many fund managers to help them select suitable investments. Single-company PEPs are, however, high-risk investments and only likely to be suitable for people who already have extensive holdings in diversified portfolios.

Ethical PEPs are not for everyone. But if you are concerned about where your money is being invested, these PEPs give you the opportunity to make a profit and satisfy your conscience.

q Sarah Barnett is editor of `What Investment' magazine.

Ethical and green fund performance

Fund Five-year Rank One-year Rank

performance (pounds ) performance (pounds )

Framlington Health 2,523.3 1 1021.9 20

TSB Environmental Investor 2123.5 2 1,252.2 1

Credit Suisse Fellowship 2,074.48 3 1,059.8 14

United Charities Ethical 1892.1 4 1,038.7 17

Sovereign Ethical 1,877.0 5 1022.0 19

Friends Prov Stewardship 1,822.8 6 1,032.8 18

Scottish Equitable Ethical 1,808.6 7 1039.5 16

NPI Global Care 1,787.3 8 1,155.2 5

CIS Environ 1,764.6 9 1,128.3 8

Jupiter Ecology 1,728.2 10 1,054.1 15

Allchurches Amity 1,688.4 11 1,099.3 10

Friends Prov Stewardship N Am 1,666.7 12 1,203.2 3

Aberdeen Prolific Ethical 1,657.8 13 1,092.8 12

Abbey Ethical 1,646.0 14 1,075.4 13

City Financial Acorn Ethical 1,605.4 15 1,094.3 11

Friends Prov Stewardship Inc 1,530.7 16 962.9 21

Clerical Medical Evergreen 1,243.7 17 1,115.4 9

FPAM Ins Ex Ethical UK Equity na na 1,225.7 2

Equitable Ethical na na 1,155.2 4

Henderson Ethical na na 1,149.6 6

NPI Global Care Income na na 1,145.6 7

Average ethical fund 1,790.6 1,101.1

Average all UK unit trusts 1,727.7 1,082.7

FT-SE All Share (xd adjusted) 2,256.7 1,307.2

Some funds are not fully PEPpable. Figures to 4 March 1998 on an offer to bid basis for pounds 1,000 invested.

Source: CIS/Standard & Poor's Micropal.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence