If you are worried that the companies in which you invest might be exploiting third world countries or damaging the environment, or if you have concerns that you may be supporting company activities that you don’t approve of, you may be interested in ethical investment, also known as Socially Responsible Investment (SRI).

Different people have different principles and not all ethical investment funds have the same objectives. Some look to invest in companies that make a positive contribution, while others specifically avoid certain companies. Ethical investors may avoid companies involved in activities believed to be harmful, such as tobacco production and pornography, whilst others may wish to support companies which make positive contributions to society, by being environmentally friendly for example. There are also ethical investment strategies which try to balance both the avoidance of some activities whilst pro-actively supporting others.

There are ethical funds that go further still by using shareholder pressure to bring about changes in company policy. By joining forces with other investors some ethical funds have successfully influenced several companies to change their practices.

Ethical investment funds use a screening process to ensure that the companies they invest in are the  right ones to meet their ethical policy. The screening will remove companies considered to be ‘negative’ and will encourage investment in ‘positive’ companies.

Choosing an ethical investment

The first step when choosing an investment is to pick one which is appropriate for your objectives and attitude to risk.

Once you have chosen a suitable type of investment you can then select a fund. Ethical investment is about personal choice. Do you want to avoid investing in companies involved in activities you dislike?  Or do you want to support firms that have a positive impact on society? Remember some funds will combine both approaches.

Each fund should state clearly its exclusions and inclusions, so you can shop around to find one that does what you want it to. Remember some funds will be ‘greener’ than others.

As a fund aims to please a lot of people, you may not find one that precisely mirrors your objectives but there should be several that are close.

Investing ethically does not mean that you have to sacrifice investment performance. As with any investment some perform better than others.

Shares in small companies can sometimes be more volatile than those of larger companies. For this reason ethical funds are often perceived as being a riskier investment than their non-ethical counterparts.  However, as with all equity funds, the price of units can go down as well as up and there is always risk in the short term, so you should be looking to invest for the long term - 10 years or more.  Investing ethically does not necessarily lead to poor performance. The performance of ethical funds is just as reliant on good management techniques as that of conventional funds.

You should be aware that past performance is no guide to the future and you may not get back the full amount invested. The value of investments can go down as well as up as a result of both market movements and exchange rate fluctuations. Performance should not be your only consideration when choosing a fund.

Funds with a strict criteria, also known as ‘dark green’, may be limiting their performance. For example, strict ethical screening can exclude whole industry sectors from investment. This can mean that you may miss out on the gains from this sector during periods of high growth. Some funds adopt a ‘best of sector’ or ‘light green’ approach. These funds may invest in larger companies often shunned by traditional ethical funds. This removes some of the risk associated with investing mainly in smaller companies. It is important to achieve a balance between your ethical and investment objectives.