Feel-good funds

Do you eat organic food, avoid clothes shops linked with using child labour and choose natural products free of animal testing?

If you do, you're already an ethical consumer. But if you want to do a bit more to save the planet and give opportunities to those less fortunate than yourself, you might think about making an ethical investment, which will also make you a financial return.

Ethical investing has been around for 100 years - the earliest example being the Methodist Church which invested in the stock market in the early 1900s, but specifically avoided companies involved with alcohol or gambling.

Today, there are at least 80 UK ethical funds, with more than £6 billion invested in them.

"More people are aware that it matters how we live and who's affected by what we do. What we invest in is just part of a picture of being a more aware consumer," says Brigid Benson, director of the Global & Ethical Investment Advice Partnership (GÆIA).

So how do you choose an ethical investment?

Benson says: "The main things to consider are what issues really bother you? Are they social, environmental or religious issues? My clients tick the things they want to avoid or support."

Investors can buy shares directly in companies or pool their money with other investors and buy into unit trusts, open-ended investment companies, investment trusts or pensions. Fund managers will screen companies to assess their suitability. Companies which aren't suitable may have involvement with arms trading, pornography, animal testing, alcohol, gambling, intensive farming, tropical rainforest destruction and oppressive regimes.

If a company gets a positive screening, they will have been judged to make a positive contribution to communities or provide solutions to environmental or social problems.

"Like most things in life, it isn't black and white," says Benson.

A colour-coding system helps investors appreciate the shades of 'green'!

There are light green funds, explains Benson, which tend to exclude companies involved in activities such as animal testing, but may invest in mainstream companies working to improve their social policies. Dark green funds are much stricter.

Ethical investors may be discouraged from ruling out too many complete sectors.

Dr Robin Keyte, chairman of the Ethical Investment Association, says: "If you use negative screening, very often that will be in certain sectors of the share market, such as the oil sector or banking sector or the mining sector. Negative screening generally removes every company within a particular sector."

"If you think about having an investment in shares but don't have exposure to those sectors, that lack of exposure increases the risk associated with the investment. You then have a toss-up between, 'Do I hold true to my ethics and stay out of those sectors and accept the higher risk or do I compromise and control my risk?'

"BP, for instance, might not pass most of the negative screens but they're not as bad as most of the other oil companies because of their substantial investment in sustainable energy projects."

Benson adds: "We'd go for the oil companies who are responding most positively to environmental challenges and are willing to invest in renewable energy. We'd go for 'best of sector' in certain things so we weren't excluding too many."

Some big names have been keen to get involved in green issues: Virgin and HSBC have introduced a new type of investment known as climate-change funds, investing partly in new technologies and partly in companies that are trying to be more environmentally aware.

Sir Richard Branson said Virgin's fund was for people who want to invest in companies with 'an environmental focus' but who didn't want to face volatility in their investments. He said it was doing business with firms lowering their carbon footprint.

Experts agree ethical investment portfolios can offer just as much of a return as conventional ones.

"A number of independent research reports indicate that ethical funds in the medium term have performed in line with conventional investments and some have consistently outperformed," says Benson.

There is also big growth in philanthropic investments, says Geoff Burnand, co-founder of Investing for Good, a social enterprise consultancy for professional advisers who help their clients to invest in good causes.

"Philanthropy is becoming fashionable - and that's good," he says.

There has been growth in 'impact' investments, those where the primary use of the money is not just to make a return but to see the difference the investment can make in the community or socially or environmentally. It gives investors a feel-good factor and the chance to see their money really working.

"Once that penny drops, it gets incredibly exciting," says Burnand. "There might be a delinquent teenagers' club down the road, a housing association, a set of poverty circumstances the investor would like to directly invest their money in and would directly like to see how that money is changing that set of circumstances."

Burnand continues: "These are investments where you are doing it because you're motivated by the positive use of this money and you're not doing it to make a quick buck."

Yet the returns can be sound. Ethical investment portfolios may offer a return of between 5-8%, says Burnand.

"They are not excessive, but neither are they sub-market rate returns. It's not the case that, just because it makes you feel good that your money is being invested in alleviating poverty, you should take a smaller return."

Various sports people have set up foundations to help the underprivileged - former Australian cricket captain Steve Waugh set up the Steve Waugh Foundation providing support for young people who suffer from chronic and rare illnesses and more recently the Global Foundation which helps manage his charity work around the world.

Benson explains: "We can help people set up charitable foundations, which are tax efficient for them because it removes part of their capital from tax. If you set up a charitable foundation, you can no longer take a personal income from it but you'd agree beforehand what the objectives were, which would normally be to invest a sum of capital with certain ethical criteria."

"It would generate an annual income and then the client can decide who they would want to benefit from the income. They could give away thousands of pounds a year to other charities without having to pay extra tax on it."

"Many wealthy people set up charitable foundations because if they don't, all that money remains in their estate and therefore is taxed and is subject to inheritance tax. That money which they have invested is earmarked to do good."

Making a feel good investment doesn't have to be all about the money. But the myth that ethical investors don't enjoy the same returns as their non-ethical peers has been truly laid to rest.