Ethical concerns that have led to sector's rise

It is surprising that the first dedicated fund to this sector only emerged just over 25 years ago. In 1984 Arthur Scargill led the miners into strike action and Torvill and Dean wowed the Winter Olympics with their perfect Bolero. A less heralded event was the launch by Friends Provident of the first retail ethical fund.

The birth of their Stewardship range allowed investors to place money into companies which had been screened for their socially responsible attitude. Today, of course, issues as broad as climate change and child labour are far more prominent.

This niche investment sector has grown into an industry worth billions. Few private investors can successfully argue with a company to change their practices but by investing in a specialist ethical fund, experienced managers can engage companies on their behalf.

In addition, some providers use an independent body to ensure their own screening has been effective. Scottish Widows, for example, meets six-monthly with an environmental and ethical independent advisory group to ensure its two funds – SW Ethical and SW Environmental Investor – are being invested in accordance with an agreed policy.

For both funds – managed since June 2007 by Johnny Russell – the largest sectors are financials, healthcare and consumer services. HSBC, Vodafone, GlaxoSmithKline and AstraZeneca are the largest holdings.

This is a field where an independent financial adviser and broker can really help. Some investors want to protect themselves from poor management of environmental, social and governance risks. Others want to take advantage of the opportunities offered by the green economy.

This is not new. John Wesley, one of the founders of Methodism, used a sermon to outline his basic tenets of social investing – "not to harm your neighbour through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers".

With 60 plus ethical funds, Jonathan Baker of Leeds stockbrokers

Charles Stanley says to check with your broker that you are not duplicating holdings unintentionally.

The two broad approaches are to screen for:

n negative activities, such as the sale of armaments to oppressive regimes, irresponsible marketing of alcohol and intensely farmed meat and dairy products;

n positive practices, such as occupational health monitoring, labour standards and provision of public transport.

Since late 2007 a flurry of new funds has focused more on environmental and socially responsible investment opportunities. "Unlike ethical funds which have been negatively screened, those selected for environmental investment may often surprise given their historic perception," says Andy Parsons of The Share Centre. He singles out two, both of which he describes as "higher risk": Schroder Global Climate Change and Allianz Global EcoTrends. They returned 30 per cent and 10 per cent respectively last year.

For UK 'green' equities, Martin Payne of Leeds stockbrokers Brewin Dolphin tips Aegon Ethical Equity which "recognises the negative effects of certain industries and has gained a reputation for the stringency of criteria applied to its investment process". He says around 30 per cent of companies in the FTSE All Share Index meet the required criteria.

If looking for overseas exposure, opt for the Jupiter Ecology fund, recommends Payne. Its manager looks for global companies which respond positively to the challenge of environmental sustainability.

Looking at funds investing outside the UK, Henderson Global Care Growth screens not only for corporate responsibility but 'industries of the future' which include energy and environmental services.

There is also a growing number of funds focused on green technologies. Stacey Johnson, investment manager at Rensburg Sheppards Investment Management, picks a recent launch: Allianz Global EcoTrends which invests in eco-energy, pollution control and clean water.

Johnson though gives a warning: "Ethical and environmental funds can become quite volatile over the short term. The key to investing in this manner is to pick a good manager, whose process and team are established and proven, and to hold the fund over the long term."

Many advisers warn that all one's savings eggs should not be in this sector as its overall performance has not been great. Non-ethical funds have outperformed ethical over three, five and 10 years.

Over these three periods, ethical funds have shown performance of -7.57 per cent, 33 per cent and 14.3 per cent. Yet non-ethical funds have grown by 3.54 per cent, 46 per cent and 50.3 per cent respectively, according to Lipper/Moneyfacts research for the Yorkshire Post. The figures are net to the end of April.

Over three years, top performers include First State Asia Pacific Sustainability (up 55.3 per cent), Sarasin Sustainable Bond (euros)(up 47.4 per cent) and Parvest Euro Corporate Bond Sustainable Development (up 45.9 per cent).

Yet, over the same period, there have been some very poor funds, such as Sovereign Ethical (down 38.4 per cent), AXA Ethical (-32.2 per cent), KS Ethical Green Solutions (-30.7 per cent) and Old Mutual Ethical (-29.6 per cent).

Some funds follow an index. The CIS Sustainable Leaders fund aims to achieve long term capital growth in line with the FTSE All Share by investing in a concentrated 'best ideas' portfolio of equities. Mike Fox, its manager, invests according to such themes as human welfare and the environment.

Legal & General's Ethical Trust takes the FTSE 350 Index and then screens out companies in such areas as defence, tobacco and most pulp and paper industries.

If looking for individual companies, The Share Centre has identified two listed on the Alternative Investment Market (AIM), both of which it rates as 'high risk': Clipper Windpower which operates wind energy technology, turbine manufacturing and wind project development Tanfield Group, a leading manufacturer of aerial platforms and commercial electric vehicles, operating in the UK, US, Australasia and Japan

There are four investment trusts which specialise in environmental and alternative energy securities. Taking a 10-year view, 100 has grown on a net basis to 172.67 with BlackRock New Energy and 171.44 with Impax Environmental Markets. Both Jupiter Green and Ludgate Environmental have not been trading as long.

Personal pensions can also be saved using an ethical approach. Look particularly at AXA Ethical, Friends Provident Stewardship, Legal & General Ethical and Standard Life Ethical.

The sustainable approach

John and Cherry Steel from Bingley have made a positive choice for part of their savings. Five years ago they took advice from Lorna Robertson of the Yeadon branch of Skipton Financial Services (part of Skipton Building Society), saying they wanted to support sustainability.

Lorna researched the market and suggested both Aegon Ethical Equity and Jupiter Ecology funds based on UK companies and global growth sectors respectively.

John and Cherry made lump sum payments into both funds. "We are prepared to take the long-term view," says John, a 68-year-old

chartered town planner.