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Ethical investment: Are you green with your money

Ethical financial behaviour

If you've ever bought organic food, chosen a product because it uses recycled material or avoided a shop due to its record on child labour you're already an ethical consumer. But you can now also follow your conscience when it comes to financial planning and sign up for anything from investments to pensions and even mortgages designed with the ethical investor in mind.

Once you've decided you want to give your finances an ethical overhaul you need to choose which issues are important to you. Some of the areas ethical investors feel most strongly about include:

tobacco production

pornography

child labour

weapons

alcohol

animal welfare

the environment

the third world

gambling

Some issues may be more important to you than others. You may, for example, be adamant that you don't want anything to do with the tobacco industry but have a more relaxed view on alcohol or gambling. Do you want to avoid certain companies, or invest in businesses that actively encourage social and environmental responsibility and you feel should be supported? It is important that your adviser is aware of your priorities.

Many financial advisers and investment funds specialise in ethical investment. Ethical funds, which first appeared in the UK in 1984, use a screening process to select the companies they include in their fund. Negative factors such as animal testing, tropical rainforest destruction and human rights abuses are used to help the fund avoid certain companies. The fund might also draw up positive criteria as a basis for investment such as whether the company gives money to the community or makes "positive" products such as hearing aids or wind power generators.

"Green", or "environmental", funds invest in products, services or processes that help the environment. They are not necessarily the same as ethical investments: a green fund that includes a waste disposal company might also invest in an alcohol manufacturer.

As well as knowing which issues are important to you you should also decide how far you are prepared to compromise. A good IFA will help you make up your mind by playing devil's advocate. Lee Coates founder of Ethical Investors Group, which offers specialist ethical financial advice, points out: "It's important to know where you draw your line in the sand. Everything can be taken to the nth degree. If you're a strict vegetarian and you decide to stick your cash under the bed can you even be sure that the dye in the bedclothes hasn't been made using animal products?"

Do ethical investments perform well?

Ethical funds are heavily weighted towards small to medium-sized companies which can make them more volatile than large companies. But in the long-run - say over five years or longer - they have a good chance of performing well. As with all funds much depends on how they are managed.

If you opt for a fund that has strict criteria ("dark green") performance may be limited by the fact that screening excludes whole sectors and you may miss out on periods of high growth. 'Best of sector' or 'light green' funds can be less risky as they may invest in larger companies that ethical funds traditionally avoid.

Other products

The Co-Op Bank has built a reputation for ethical investment but double check its stance on areas of particular concern to you. You should also be able to find an affinity card that backs a cause or charity you support.

Useful links

The Investment Management Association www.investmentfunds.org.uk

The Ethical Investors Group www.ethicalinvestors.co.uk

To find an "ethical" IFA just use Tiscali's handy tool - all you need to do is type in your postcode, tick the ethical box and you will see a list of those advisers closest to you who specialise in ethical investment.

You can also check out the Ethical Investment Association which is a nationwide body of independent financial advisers, which aims to facilitate the promotion of ethical investment by its members, and to set standards in the ethical investment industry.

The Ethical Investment Research Service provides the independent research into corporate behaviour needed by ethical investors to enable them to make informed and responsible investment decisions.

See which FTSE 100 companies donated the most to charity on The Guardian's web site.

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