From its religious roots, ethical investment has evolved through the social and corporate responsibility emphasis of the 1990s, into a new phase. Green investing, with its concentration on environmental issues, has long come under the broad ethical banner, but the next big thing, climate change investing, is deliberately not being pitched as an ethical issue.

Proponents argue that there are serious financial gains to be made from investing around this theme. Make money, not carbon dioxide, so the argument goes.

Seb Beloe, head of socially responsible investment (SRI) research at fund manager Henderson, says: "The most recent shift in ethical investment has seen the industry move even closer towards becoming a form of mainstream investing. The focus increasingly is on companies providing solutions to challenging social or environmental issues such as climate change.

"Ethical and SRI funds have proven popular over the last few years, as companies with an active focus on environmental issues have benefited from growing political and consumer support. However, 2008 has brought an altogether more turbulent market, and clean-tech and other SRI funds have not remained immune to the downturn. But even so, the outlook remains promising. New legislation, focusing in particular on climate change, but also championing social issues such as healthcare and product safety, continues to be developed in the UK, EU, US and beyond, serving to provide continued good news for investors in these sectors."

The upward trend of ethical consumerism will be a key long term driver of growth, according to Charlie Thomas, manager of the long running and popular Jupiter Ecology Fund. He says: "We are at the most interesting juncture in 20 years in terms of green investing. The major underpinning of our investment strategy for the fund over the past few years has been based on three long term growth drivers. The first of these is the consumer. We have seen a dramatic uplift in activity over the past two years and while we would expect this to continue, it has not yet been tested in an economic slowdown, so it will be interesting to see how the ethical consumer behaves in the coming months.

"Secondly, there has been a huge shift in governmental and corporate policies. Legislation has diverted capital flow and this is likely to continue, potentially at an even greater rate in Asia and the US, for example.

"Finally, capital expenditure commitments by corporates have had a dramatic impact on this area. Factors such as high energy prices mean there is a direct economic imperative for moving forward on environmental issues and companies have not failed to recognise this. While the general principles of the Ecology fund have remained consistent over this period, the universe of stocks in which we can invest has expanded dramatically from around 250 stocks then to over 1,000 now and this is growing every day."

Investors who want to align their pounds with their principles, have a broader choice of investment funds than they did a few years ago. However, as one person's ethics may be another's vices, you need to make sure that a particular fund's agenda fits with your own stance.

This will involve some research and to help you, the Ethical Investment Research Service (Eiris) has a useful free directory of 78 green and ethical funds. Contact www.eiris.org . The profiles provide detailed information on investment strategy, screening criteria, engagement and voting policies, and fund manager details. The directory allows you to search for ethical funds according to a specific issue, for example, human rights, gambling, or the environment.

There are also a growing band of independent financial advisers (IFAs) that specialise in ethical investing and can help you find a suitable fund. You can search for an ethical IFA in your local area using the Find an IFA search facility at www.unbiased.co.uk

ETHICAL PIONEER FUNDS

The largest and longest running ethical investment fund is the Stewardship Growth Fund run by Ted Scott at F&C Investments, which was launched in 1984. It has a broad ethical remit to invest mainly in UK companies whose products and practices are considered to be of long term benefit to society.

The Jupiter Ecology Fund, the first green investment fund to launch, is also widely respected and celebrating its 20th birthday this year. It is considered 'dark green' in that there are rigorous ethical exclusions on the companies that fund manager Charlie Thomas can invest in, while actively focusing on six green investment themes: clean energy, water management, green transport, waste management, sustainable living, and environmental services.

CLIMATE CHANGE FUNDS

Some specialist funds have been investing in the technology involved in aspects of climate change for many years, such as Impax Environmental Markets. This well respected investment trust, managed by Ian Simm and Bruce Jenkyn Jones, invests in cleaner or more efficient delivery of basic services such as energy, water and waste.

Investments are made predominantly in quoted companies involved in alternative energy and energy efficiency, water treatment and pollution control, and waste technology and resource management.

Impax believes that the universe of companies developing and promoting new technologies to address the world's environmental problems is one of the most exciting, dynamic and fastest growing segments of the global economy. For example, fuel cell technologies offer more efficient, stable and reliable energy supply for the world's automotive and power industries. Biomass, superconductors, flywheels, photovoltaics, hydrogen technologies and wind turbines are influencing electricity supply across the globe. There are also exciting developments in long lasting batteries, water purification, reverse vending machines and digestion technologies that will offer compelling value propositions to consumers.

However, the concept of a true climate change fund, investing purely on the basis that its holdings will benefit from the problems faced by climate change is a relatively new concept. Several fund managers have launched climate change-related products in the past year: Allianz, F&C, HSBC, Schroder and Virgin, with more expected over the course of this year.

Although investment strategies vary from investment house to investment house, most companies that are set to benefit from the problems posed by climate change can be divided into the following groups:

TRANSPORT: Fuel research and development of more efficient cars and buses

WATER: Desalination and water purity testing to help us cope with more stretched water reserves

WASTE: Recycling and waste reduction

ALTERNATIVE ENERGY: Solar, wind and wave powered electricity, plus nuclear power

CLIMATE CHANGE MITIGATION: Crop development and health research

Note that investment houses are deliberately not pitching their climate change funds as ethical funds, but as funds that embrace the new industry that has risen up from the problems posed by climate change.

TRACKER FUNDS

There aren't many ethical trackers on the market. The L&G UK Ethical Trust tracks a customer index created by screening the FTSE 350 index on a set of ethical criteria determined by L&G's head of corporate governance, Andy Banks, in 1999. However, fund analysts at Morningstar say the ethical criteria that led to that portfolio might surprise investors seeking a stringently screened offering. For example, it can hold companies that operate in up to four unsavoury countries, but not in five. The distinction appears to be without ethical justification, but it permits the fund to invest across a broader group of securities. L&G charges investors a total expense ratio (TER) of 1 per cent a year to run this offering. Morningstar says: "We appreciate that there will be a fee paid for the social screening and the fund is cheap by ethical fund standards, but at the end of the day, it's expensive for a fund that requires no active management."

However, according to Morningstar, this is the cheapest retail ethical fund and has performed solidly relative to other UK-focused ethical offerings.

There are also two funds that track the FTSE 4 Good index, which includes companies with good corporate responsibility practices: the CIS FTSE4Good Tracker Fund and the Direct Line FTSE4Good tracker fund. However, may fund managers think that the FTSE 4 Good index is simply too imprecise a tool on which to base products. Its creators see it as a way of encouraging good environmental performance as well as a tracker.


THREE WAVES OF SOCIALLY RESPONSIBLY INVESTING

1: Values

•Driven by ethical values

•Focused on excluding certain types of activities using negative screens

2: Value

•Enabled by differing standards of corporate responsibility

•Focused on best-in-class social and environmental performance and financials

3: Vision

•Enabled by emergence of environmental and social issues as significant mainstream investment issues

•Focused on investing in 'solutions-providers'

Source: Henderson


NATIONAL ETHICAL INVESTMENT WEEK 18/24 MAY 2008

The UK's first ever National Ethical Investment Week, starting on 18 May, will be dedicated to raising awareness of ethical and socially responsible investment, answering investors' concerns and dispelling a few myths.

During the week, independent financial advisers at Barchester Green Investment will offer a fee free initial review report for people considering introducing ethical screening into their financial planning. Contact info@barchestergreen-london.co.uk for more information.

Also, ethical investment professionals at Rathbone Greenbank Investments will offer a free ethical screen and strategy discussion for investments over £200,000. Contact greenbank@rathbones.com for more information.

There are also a range of seminars and discussion groups open to the public. To find out more about events taking place and how you can get involved, visit the website at www.neiw.org

By Moira O'Neill

THE LATEST ETHICAL FUNDS NEWS, FROM MONEY CAN BE GREEN