For many years the majority of investment managers believed that ethical investing was for wimps. But recently, ethical and 'green' funds have produced excellent returns, and more managers now reckon that investing in 'good' businesses can make more money.
Ethical investing started back in 1758, when the Philadelphia Quaker Yearly Meeting agreed not to participate in the business of buying and selling humans.
Later, notable Quakers like the Frys and Cadburys founded business empires while adhering to ethical principles. But it was the Methodists, notably John Wesley, who gave it a boost in the late 1800s, with a general injunction 'not to harm your neighbour through your business practices'.
Green investing becoming more mainstream
All this was back in the days when investing was something done only by wealthy individuals. But in the 1970s it came to life again in the US when the World Pax Fund was set up in response to images of napalm-bombed Vietnamese villagers on fire that also led to boycotts of the napalm manufacturer, Dow Chemical.
The Co-op can claim to be the UK's oldest ethical institution and the Co-op Bank has always applied strict criteria, for example never lending to South Africa during the apartheid regime. Friends Provident - another Quaker-founded business - set up its Stewardship Fund in 1984.
This £800 million fund is now managed by F&C. And the first environmental fund, Jupiter Ecology, was launched in 1988. Now there are scores of ethical funds and about £9 billion is invested in ethical and environmental funds in the UK.
Legislation helping fuel the change
Government regulation is playing a part. From 2001, pension fund trustees had to state in their annual reports the extent to which social, ethical and environmental criteria are used in selecting investments. And the latest Company Act requires companies with a UK stock exchange listing to produce an annual report on its social and environmental policies.
Even without this, though, companies were and are turning green in response to public opinion. Marks & Spencer was the first big UK company to make a splash with its 'Plan A' to go carbon neutral. Its boss Sir Stuart Rose said the plan got its name "because there is no Plan B." Since then, Sainsburys has taken up the fight against plastic bags and other retailers have joined in.
Meanwhile, the ethical aspect has been given a major presence in the High Street thanks to the success of Fairtrade, an organisation that channels extra cash back to third world producers, most of which is used for collective projects like schools, sanitation and water. The Co-op was the first national retailer to promote Fairtrade and now all its teas and coffees carry the Fairtrade logo, and other supermarkets like Sainsburys too now carry a big range of Fairtrade products.
How to decide who is ethical
But ethical or environmental investing isn't straightforward. Sainsburys may be doing its bit for the environment, but it sells booze and fags - both anathema to most ethical investors. How do you decide which businesses are 'good'? Most investment managers use the Ethical Investment Research Service (EIRIS) which publishes information and research for individuals and investment managers, as a basis for their own research.
Most investment managers use 'negative filters' that exclude certain types of business: nuclear power, pornography, gambling, animal testing, armaments manufacturing, tobacco and alcohol being the most common. But to avoid throwing baby out with the bathwater, most also allow companies to have up to 5% or 10% of their sales in these 'bad' activities if the bulk of their business is 'good'.
While some managers just leave it at that and say they can buy shares in any company that hasn't been excluded, others use positive filters to find businesses that are actively doing good, either socially through community engagement or environmentally through their policies or technology. And a few managers apply 'engagement': they buy enough shares to get into the boardroom and ask the bosses to do better.
Climate change fund can be risky
Some investment managers have latched onto fashion recently with the launch of 'Climate Change' funds. The trouble here is that the things that really will help in the battle to cut carbon emissions are brand new technologies, and creating and developing these is the riskiest possible type of investment.
So most managers fudge it, like Virgin, which in fact invests under 15% of its money in the real climate change stuff and then invests the rest in companies like Centrica (British Gas) on the basis that it's the least bad of the companies supplying energy to households.
If this sort of investment appeals to you, ignore the newcomers and stick with the longest-running fund Jupiter Ecology, which has produced excellent returns in the past few years and always has a significant chunk of its money in companies developing new technologies.
Many other good choices
Another long-runner, the Co-op's Sustainable Leaders Trust, was the top performer out of over 300 similar but non-ethical funds last year. The Co-op applies ethical standards across its whole £19 billion of investments so it has a large team doing the research.
F&C and Jupiter have good credentials, as does Standard Life Investments (SLI UK Ethical Fund), but for an ethical fund operating worldwide, look at Aberdeen Ethical World.
All these funds have taken a hit along with the falling world stock markets of the past six months, but over the long term they look likely to do as well or better than their non-ethical rivals.
