Can you invest with a clear conscience?

By James Coney for the Daily Mail
Updated: 05:53 EDT, 11 May 2011

Investors who want to keep a clear conscience may have to sacrifice profits to invest in companies that match their principles.

UK shares: Companies in the FTSE 100 index of the biggest companies include weapons makers BAE Systems

Many investment funds specialising in ethical investing are easily beaten by their peers, in some cases losing money when their rivals are making profits.

Avoiding companies you don't like can be enormously problematic.

Everyone with a pension holding UK shares is likely to have some money tied up in weapons producers, bookies and casinos, tobacco companies and unpopular banks.

Last week the Mail investigated the newest big entrant to the UK stock market, commodities trader Glencore, which has been accused of shadowy business dealings and questionable tax practices.

As such, it may not be to the taste of all investors — particularly those with a more ethical streak. But ruling out types of companies you don't like can be tricky.

Companies in the FTSE 100 index of the biggest companies include weapons makers BAE Systems, oil company BP, British American Tobacco and Imperial Tobacco.

Pick any of the most popular funds in the UK and you are likely to have a small share in one or all of these, as well as banks. Take the massive Invesco Perpetual Income fund, it avoids banks, but has large sums of money in the two tobacco companies.

If you are going to take an ethical approach to investing, you need to decide which type of companies you don't want to invest in and those which you are prepared to stomach.

Some funds choose companies negatively, which means they rule out companies deemed to damage the environment or which they believe to be unethical. Once these firms are ruled out, the fund invests where it likes.

Then there are those that screen positively, which means selecting companies that do good. Specialist financial adviser The Ethical Partnership has a long questionnaire for investors who decide they want to take this approach.

Director Jeremy Newbegin says: 'People may think they want to do their bit, but one answer often just leads to another question. It really does test people's values.

'At the end, a person has to decide whether they are really ready to limit the choices of companies they are willing to invest in.'

There is unlikely to be a perfect fund to meet your needs. Many ethical funds may rule out tobacco companies, arms dealers and gambling firms, but they will still plough money into the shares of banks.

For example, CIS Sustainable Leaders, run by the Co-op, claims to choose companies that work to address some of the key social and environmental challenges shaping our future.

Yet 13 % of its money is in financial companies such as banks, including large amounts in HSBC, Lloyds Banking Group and Barclays — companies a lot of ethical investors may find undesirable.

CIS says: 'If provided responsibly we believe banking products and services are not unethical. For example, mortgages and savings products have the ability to enhance the lives of those who use them.

'In the past there have been issues of irresponsible practices, driven largely by poor remuneration policies. We believe banks are learning from past mistakes.'

The pioneering F&C Stewardship fund has around 6 % in HSBC.

Restricting your investment choices can be bad for your wealth. The Stewardship fund, for example, has lost 0.16 % over a year, while the average fund has gained 4 %. It also lags well behind over five years.

Tobacco, gambling firms and weapons makers have been among the best performing areas in the past decade.

For those who don't want any companies involved in alcohol, tobacco and weapons production, gambling and publication of violent or explicit materials, then the Ecclesiastical Amity International fund is a good place to start — particularly as it also does not hold much money in banks, either.

Most of the money is split between the UK, Singapore and Hong Kong in largely unknown companies — though it does invest in pharmaceuticals giant Glaxosmithkline and phone company Vodafone.

It has fared well, even during the credit crunch, which hit many ethical funds hard. Over one year it is up 6 %.

And over five years it is the third best global fund, delivering returns of 62 % when rivals managed only an average of 17 %.

For a guide to ethical investments see here.