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ethical investment funds

Introduction

The amount of money invested in ethical funds has grown rapidly, increasing substantially in the last decade. There are now well over 100 ethical pension and investment funds available in the UK and the popularity of such investments looks set to continue.

Growth of UK Ethical Investments 1989-2007

Millions of pounds invested in ethical funds (£m)
1991 318
1992 372
1993 448
1994 672
1995 792
1996 1088
1997 1465
1998 2198
1999 2447
2000 3296
2001 4025
2002 3800
2003 3570
2004 5532
2005 6078
2006 7490
2007 8881

Source: Ethical Investment Research Services (EIRIS)

Shades of green

When thinking about whether to buy an ethical fund, it is useful to understand the ethical policies followed. What sorts of companies are considered for investment and what checks are there to ensure these criteria are rigorously followed?  There is a wide range of funds with different approaches to choose from:

'Dark green' funds

These have the strictest investment criteria, avoiding investing in companies that have a poor record on environmental, human rights or other ethical grounds. Dark green funds normally exclude companies involved within the defence, tobacco, gambling and alcohol sectors,
An area of the economy where businesses share the same or a related product or service, for example, Pharmaceuticals, Telecommunications or Retail.
as well as others such as mining companies.

'Light green' funds

Usually with a broader remit than 'dark green' funds, these often take a 'best of sectors'
An area of the economy where businesses share the same or a related product or service, for example, Pharmaceuticals, Telecommunications or Retail.
approach. They don’t normally avoid whole sectors but often concentrate on the most socially responsible companies in a particular sector.

Other types of ethical funds

These include funds that invest in companies specifically because of the positive contribution they make to the environment. Recycling companies or those involved in renewable energies such as solar or wind power come into this category. These are examples of positive screening.
A positive screening strategy means a fund will seek to invest in those companies with a commitment to responsible business practices, positive products and/or services.
In reality, most ethical funds – including 'dark green' ones – also invest in such companies.

Engagement funds

There is no screening involved in these funds, instead they focus on using their influence as shareholders to challenge companies about their environmental or social performance. In practical terms, this means entering into a dialogue with companies to improve their environmental or social policies and to promote industry 'best practice' along with a continuous improvement in the way they run their businesses. Read more about the engagement processes used by fund manager F&C Investments.