Last updated 05:37, Friday, 01 August 2008

When I was asked to write this article on ethical or socially responsible investment my initial thought was ‘Here we go, another piece on saving the environment’.

A question of ethics: Many savers do not want to invest in the arms trade. Others are concerned about the environment, animal welfare or public health

But after giving more thought to the issue I realised that ethical investment is not just about hugging a tree.

I thought I would start by looking up “ethical” in a dictionary. Among the descriptions given, this seems to be the most appropriate: “being in accordance with the accepted principles of right and wrong”, although I would perhaps substitute ‘your’ in place of ‘the’.

So the definition of an ethical investment is one that is “in accordance with your principles of right and wrong”.

One investor’s view may be that nuclear power, for example, is the root of all evil while another may regard it as the way to reduce carbon emissions and reduce global warming.

What is the background to ethical investment? It dates back to the 19th century, when religious movements such as the Quakers and Methodists voiced concerns over issues such as fair employment.

At the turn of the 20th century, the Methodist Church began investing in the stock market, but avoided companies involved in alcohol and gambling.

The first ethical fund – the Pax World Fund – was set up in the US in 1971 as a stance against the Vietnam War.

In the 1980s the apartheid regime in South Africa accelerated the promotion of ethical investment. The UK’s first ethically-screened unit trust – Friends Provident’s Stewardship Fund – was launched in 1984.

The choice of funds has grown rapidly over recent years as concerns about man’s impact on the environment have increased.

Some funds invest in companies that actively seek to better the environment by developing renewable energy techniques, recycling or helping poorer economies.

There are also funds that invest in “vegan” companies, which avoid anything to do with meat or meat products.

Others avoid companies that, for instance, manufacture weapons, develop nuclear power stations or produce cigarettes or alcohol.

So how do you know your investment portfolio really matches your ethics?

Well, it may not be as easy as it seems. Climate change funds seem to be all the rage at the moment with five new climate change funds launched to the market since the start of this year.

But is a climate change fund ethical?

For example, one newly-launched fund admits that it will not invest in any company it believes is causing global warming but will invest in arms or tobacco companies.

A good, independent financial adviser should be able to guide you through the selection process and, with more than 75 ethical funds to select from, should be able to construct a portfolio matching your principles.

Historically, ethical investment meant accepting below-par returns. However some of the longer-established ethical funds have provided returns consistently ahead of the FTSE All Share Index.

Ethical investment is moving into the mainstream with even the well-established fund managers becoming aware that more and more investors are interested in the wider impact their investment decisions may have.

Ultimately, the choice is yours, but with the range of ethical funds expanding all the time, following your principles is becoming easier.

For advice on ethical investment call freephone 0800 195 2161 or email moneymatters@armstrongwatson.co.uk