The grass can be greener

Ethical investments with good performance? It's not impossible, writes Rachel Fixsen

Most of us want to put our money where our mouths are, though actually parting with hard-earned cash is often more painful than our principles are prepared to allow. Yet, as increasing numbers of investors have begun to discover, obeying your conscience need not lighten your wallet after all.

One powerful way of trying to change the world is lending money to companies which operate ethically and withholding it from those that don't. Buying units in ethical or ecological investment funds gives you the opportunity to do just that and can reward you with rich returns in the process.

Ethical funds, which started about 12 years ago, select investment targets by screening them using a variety of criteria. Typically firms with alcohol or tobacco products or those making weapons are ruled out while companies trying to improve the environment and community are included.

"There's certainly been an increase in demand and awareness that they actually exist," says independent financial adviser Christine Ross, of Abbey National Independent Financial Advisers.

Some pounds 1.3bn is under management in the UK in ethical investment funds not including segregated funds such as local authority pension funds which are not available to the public but which have pounds 50-60bn under management.

Giles Chitty, managing director at Barchester Green, IFA specialists in green/ethical investments, says ethical funds are likely to become more prevalent as more local authorities apply moral criteria to their investments. Already, many authorities work with Pirc, a research firm which uses their holdings in an attempt to lead shareholder "rebellions" to achieve more ethical business management.

Growth of ethical trusts has been slow to date compared to the sums pouring into ordinary unit and investment trusts. However, many ethical financial experts argue this is because, despite surveys showing the overwhelming majority of investors would like to be given a choice, very few of them actually are told there may be an ethical option open to them.

Despite the continuing growth of ethical funds, a common worry from a financial point of view, sometimes put about by funds whose ethical viewpoint may belooser, is that their returns may be poor because some of the stock market's better performances might be given the moral thumbs-down. It ain't necessarily so.

Friends Provident's Stewardship unit trust has been running since 1984 and now has nearly pounds 400m under management. A pounds 1,000 investment in the trust five years ago would have grown to pounds 1,827 by now, ranking the fund's performance 43rd out of 124 UK growth funds, according to research by Co-Operative Insurance Services and Micropal, the specialist financial statistics provider.

Jupiter's Ecology unit trust has also performed well, ranking 34th out of 130 funds in the international growth sector on five-year performance. CIS's Environ fund follows closely, coming 40th.

Depending on how strict a fund's ethical criteria are, up to 40 per cent of stocks in the FTSE All-Share index can be ruled out. But Richard Singleton, member of the investment team at Friends Provident, argues that if you are faced with an extremely wide pool of potential investments, you may not be able to gain the necessary depth of knowledge. "If you have a narrow choice, then you can concentrate more," he says.

Mr Chitty agrees that slimming down the range focuses the investment research "The evidence is that they perform as well as conventional funds," he says.

According to MoneyFacts, the financial information provider, average performance over five years for ethical unit trusts in the UK growth sector was slightly below that of conventional funds in the sector. It all depends on your statistics. Ethical funds argue that when compared to the FTSE share index, up 67 per cent over the same period, they have done slightly better, as our table shows.

Ethical funds avoid many of the larger blue-chip stocks as big companies are more likely to have something, somewhere, which will rule them out, says Mrs Ross. "They tend to go toward the medium and smaller companies, and in turn, their performance is more volatile," she says. This means ethical investments are better suited as long-term holdings, ideally between seven and 10 years.

Pensions are long-term investments and many personal plans give you the option of asserting your moral view here. Friends Provident and NPI are among providers giving this option.

NPI's Global Care pension fund has done particularly well. MoneyFacts ranks it fifth out of 177 funds in its sector for its performance over the past three years.

Most fund managers use an independent agency, the Ethical Investment Research Service (EIRS), to research quoted companies, weeding out the ethical or environmental undesirables.

Criteria vary greatly from fund to fund. Nearly all ethical funds avoid companies involved in tobacco production, according to MoneyFacts data, but only Scottish Equitable's Ethical fund and NPI Global Care ban companies which make political donations. Any investor can use EIRS to screen their personal portfolio of shares according to their own ethical criteria. For a pounds 50 fee, EIRS will screen up to 20 companies according to the agency's set criteria, and pounds 350 buys you a more comprehensive service.

Barchester Green Investment 01722 331241; EIRS 0171-735 1351