New Year's Resolution - Let's go green

If you wake up in the New Year with a resolution to save the planet, (in addition to forgoing all vices), there are plenty of ways you can assuage your conscience via your wallet. It may even make you some money. Ethical investment has burgeoned from an alternative choice for a tree-hugging minority to a growing slice of mainstream investment.

There are just under 100 different funds on offer in the UK - 20 have been launched in the last two years. By December 2006 half a million investors in the UK had dipped their toes in ethical waters, investing £7.2 billion.

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This year that figure could reach £8 billion, according to the independent research body, Ethical Investment Research Services, (EIRIS). EIRIS examines the non-financial performance of listed companies in developed countries. It assesses them on the basis of social, environmental, and ethical criteria and supplies this information to clients such as government bodies managing pension funds, charities, and investment houses.

Mark Robertson from EIRIS, says that the expansion in ethical funds has been consumer driven and can be seen against a backdrop of a growing awareness of ethical issues. This has meant that people are thinking about "who they bank with, where they are investing their money, the implications of their investment".

In the same way that they select greener products at the supermarket, they factor in ethics when it comes to long-term finances. Robertson believes that the public's attitude to ethical investment has become more sophisticated. Ethical funds, or socially responsible investment as it is sometimes called, traditionally used screening to pick investments. This would often be negative screening - for example not investing in animal testing, tobacco production, nuclear power, the arms trade, etc.

Nowadays there are a number of strategies fund managers use to broaden the basis of their funds. Positive screening means choosing companies which are involved in activities as diverse as renewable energy, pollution control, community involvement, public transport, packaging reduction and sustainable forestry.

Thematic investing focuses on certain sectors such as recycling and waste management while the preference - or best-of-sector method - chooses companies which are the most socially responsible within a sector that is not generally considered ethical.

Surprisingly this might even mean that an oil producer could be included if regarded as socially responsible enough.

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Time to get 'engaged'

Some fund managers use "engagement". This approach looks at investing in a business and using share ownership to improve the ethical performance of the company.

Different funds employ this basket of methods to varying degrees with the result that acompany may fit the criteria for one funds selection but not be suitable for another. This can make it difficult to compare like with like and assess performance.

As a way of measuring overall success the FTSE4Good Index Series was launched in 2001. It has its own standards for inclusion and covers the UK, Europe, USA, Japan and global markets. These criteria are reviewed regularly and companies that fail to meet it are deleted from the index.

But will going green benefit both your conscience and your finances? How do ethical investments perform when compared with the rest of the market? There has been a perception that ethical funds are poor relations. Cooperative Insurance Services has helped to challenge this notion last year when its CIS Sustainable Leaders Trust came top of the UK All Companies' Index for 2006, outperforming conventional rivals.

Specialist adviser, Barchester Green Investment, has been gathering statistics on the performance of pension funds from several large insurers and comparing their ethical UK Growth funds with their conventional UK Growth equivalents. It has found that by and large the ethical funds had the edge over the period of one, three, five and ten years.

Want to know more? Read Moneyextra's guide to Ethical Investments.

17 December 2007 © Moneyextra.com

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