What matters more to you when you invest? Your principles or profit? Society’s increasing awareness of environmental and social responsibilities is impacting on financial services. Investments, bank accounts, pensions and mortgages based on ethical principles are now available.

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The theory is that companies making a positive contribution to the world, people and wildlife run less risk of rows with regulators, costly court actions, strikes, or boycotts of their products, all of which can have a bad effect on the share price.

Environmentally aware firms should, therefore, have better long-term prospects. For example, a forestry company that cuts down more trees than it plants will eventually run out of trees to sell. A more environmentally responsible firm that plants more than it harvests will have an endless supply.

The idea originated in the US, where church groups control billions of dollars and often did not want the money used to prop up repressive regimes in the third world. It became very popular in the 1970s when the Vietnam War led to some investors questioning what their money was funding.

In 1983, Friends Provident – a life insurance firm founded by Quakers – set up the first so-called ‘ethical fund’, in the UK, with the investment criteria determined by a separate committee. This led to the launch of The Stewardship Unit Trust, the Stewardship Life fund and the Stewardship Individual Pension Fund a year later. These funds have now been rebranded F&C.

How to invest ethically

The best route to ethical investing is through managed unit trusts and Oeics. Because it can be difficult for you to judge whether a particular company is operating ethically or not, most ethical investments are held through managed funds.

These operate in the same way as conventional funds – in that they buy baskets of shares in a chosen sector – but before they make the decision to invest in a company, an ethical fund manager will run checks on the company to find out if it has interests in a number of positive and negative criteria.

Positive criteria includes:

Specific environmental protection practices.
Pollution control.
Extensive involvement in conservation and recycling measures.
Ethical employment practices, such as recognising trade unions and treating workers fairly.

Negative criteria includes:

Involvement in armaments and nuclear weapons manufacture.
Animal exploitation and testing.
Involvement in supporting oppressive regimes.
Alcohol and tobacco promotion.
Environmentally damaging product practices.
Gambling.
Pornography.

Criteria such as this will always be open to interpretation and manipulation which poses the question: how ethical is ethical? If you invest through a fund that will be down to the fund’s stated policy. However if you invest directly in shares you will have to decide which ethical values are the most important to you.

For example, you might consider investing in a bio-technology company which is developing a cure for cancer but is also involved in genetically-modified foods which may not fit your criteria. You have to decide the priority you give to your principles otherwise you may end up not investing in any companies at all. There is a risk involved in having very strict criteria – you may not end up with a balanced portfolio.

There are a large number of funds in the UK that apply ethical or environmental criteria. Some of the major funds include ones from: Aberdeen, Allchurches, CIS, Clerical Medical, Credit Suisse , Framlington, F&C, Henderson, Jupiter, Legal & General, Lloyds TSB, Norwich UK, Scottish Equitable, Sovereign and Standard Life.

Making the rest of your finances ethical

If you’re interested in ethical banks and building societies, there are a few which ethically screen their business including Co-operative Bank, Shared Interest and Triodos Bank. Ecology Building Society and Norwich & Peterborough Building Society offer energy-efficient or ‘green’ mortgages if you plan to renovate or make your home energy efficient.

Occupational pension schemes can now invest in ethical pensions and if you are not eligible to join a scheme you can always take out your own ethical personal pension. Where a provider doesn’t specify an ethical fund it’s still worth checking if one is available, as many stock market funds can be placed in a pension wrapper.

You could also move your car insurance to a provider with a track record of sound ethical policies. Providers include the Environmental Transport Association, which does not lobby for more roads.

Ethical investing as a pressure tool

If you have a concern about a company you have invested in, write to the chief executive or go to the annual general meeting when the company’s board has to face its shareholders and answer questions. You could also join a pressure group that adds a communal voice to a concern.

Where to find out more

The Ethical Investment Research Service (EIRIS), a charity aiming to raise awareness of ethical investment, publishes a list of ethical financial advisers. EIRIS does not offer financial advice but can point you in the direction of people who can. It also provides a number of useful leaflets on a range of financial issues. Contact 020 7840 5700. Many specialist ethical IFAs are contactable through the UK Social Investment Forum.

EIRIS can also provide details of pressure groups and shareholders campaigns in its newsletters. And, for a fee, EIRIS will screen your existing portfolio for positive and negative features and create a list of companies that match your chosen ethical criteria.

You can also read fund managers’ stated investment policies – these are published and available to any would-be investors. Many financial advisers have computer databases that scan the ethical composition of most of the major investment funds.

By This Is Money
UPDATED: 17:56, 5 October 2012