Striking a balance between principles and making a profit

Many investors are looking for investment vehicles that invest in companies with a social, moral or environmentally responsible agenda.They also require that each fund has its own set of criteria and rules about the types of companies in which it will and won’t invest.

If you are considering this as an option for yourself, firstly you need to determine your attitude to risk. If you’re a low-risk investor, for example, you might want to avoid a collective investment fund that holds stocks and shares altogether, while only aggressive investors should sink their money into collective investment funds investing in high-risk companies such as renewable energy start-ups. You should also diversify to reduce risk. It may be appropriate to spread your investment between different funds, sectors and geographical areas around the world. There are plenty of ethical funds that invest throughout the UK, Europe, the US and Asia, and in sectors such as bonds.

Most ethical investment funds can be held within the wrapper of your 2008/09 Individual Savings Account (ISA) allowance of £7,200, which would mean you mitigate most income tax and all capital gains tax on the money you make. There are also numerous pension companies offering ethical funds, and more experienced investors could consider a self-invested personal pension (SIPP). These free you to invest your pension in the full range of UK-based investment funds, including many ethical funds.

Socially responsible investment (SRI) funds are slightly broader in their investment approach than ethical funds. For example, an ethical fund might never invest in a company that practises animal testing, whereas an SRI fund might, but only if it was animal testing for life-saving medicines.

Ethical and SRI funds are measured in shades of green. A ‘light green’ fund uses more relaxed investment criteria when selecting stocks than a ‘dark green’ fund, which has more rigid ethical or environmental requirements.

Both ethical and SRI funds will ‘screen’ or vet companies before investing in them. Ethical funds work on negative selection, so they will exclude companies that invest in ‘unethical’ activities, such as making or selling arms or tobacco. They invest only in areas that fulfil the particular investment company’s own ethical requirements for the fund.

An SRI fund combines both negative and positive criteria when creating its portfolio, so it will pick both companies that it thinks ‘do good’, as well as those that might not instantly stand out as 100 per cent ethical with the aim of promoting change from within.

Although the environment might play a part in the screening process for ethical and SRI funds, strictly speaking a climate change fund is a separate entity. A climate change fund will invest in companies that are developing environmental solutions, such as building wind farms or utilising solar power.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

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