(Un)funny money

If you've got money to invest, how do you invest it ethically (apart from putting it into Red Pepper)? Fiona Osler offers a beginners' guide to socially responsible investment

The idea of ethical investment has a long pedigree. Quakers have invested ethically since the 1500s, refusing to put their money into the slave trade or alcohol. The Islamic, Christian and Jewish faiths all have laws against usury and not profiting from others.

Put simply, ethical or socially responsible investment (SRI) takes into account social, environmental and other considerations in seeking out projects that make a positive contribution to the welfare of humanity and the planet, and excluding those that cause harm.

As a movement, ethical investment began in the 1970s with the Pax World Fund, set up in the wake of the Vietnam War to avoid associated investments. Early strategies focused on 'avoidance investments' by anti-war and faith groups, trade unions and charities.

This was followed by 'divestment strategies' involving the sale of shares to register a political view and effect change. The campaign against companies doing business with apartheid-era South Africa was the most notable.

Ethical investment has come a long way from the days when such investments were nicknamed 'Brazil' funds because people who put their money in them were thought to be 'nuts'. According to the Ethical Investment Research Service (EIRIS), the UK market was worth over £6 billion in 2005, an increase of around 600 per cent in 10 years.

Deciding your criteria

So what do you need to do to become an ethical investor (apart from having some money to invest)?

First, decide your criteria. It would be hard to find a fund that is all things to all people - it's a very subjective process, with fund managers seldom all screening for the same things.

Screening can be purely negative - against companies seen to be bad for our health, the environment, human and animal rights.

This is sometimes divided into 'dark green' and 'light green' investments.

'Dark green' strategies exclude most large companies and those involved in the arms trade, oppressive regimes, animal testing, factory farming, gambling and tobacco. An example of a 'dark green' fund is Aegon's ethical fund.

It excludes companies operating in countries that are involved in GM food, or in meat and dairy products to appeal to vegan investors.

'Light green' strategies hold less risk and may consider banks, pharmaceutical and oil companies that have shown a commitment to improving practices and policies.

These sorts of investments have become more common in recent years as many funds have relaxed their criteria in a bid to increase returns.

Positive screening actively seeks companies with good social and environmental practices - fair trade, organic products and alternative energy solutions fall within this category. Most funds screen for a mix of positive and negative.

By dangling the carrot of more investors, the idea is to encourage companies to adopt more ethical policies and practices.

Picking a starter fund

Unless you have nerves of steel, the safest way to invest is to choose from the established funds that spread the risk across a variety of green and ethical investments.

Examples include the Jupiter Ecology Fund, Standard Life UK Ethical fund and Aegon Ethical Equity.

EIRIS has excellent information about ethical investing and a directory of ethical financial advisers.

You could also dip your toe into the waters of cause-based investments.

Although they offer a lower rate of return, they allow investors to support a particular cause, such as organic farms, regeneration or new fair trade initiatives.

Other things you can do

Swap your current bank account. You can't do much better than a smile or other co-op account. NGOs, trade unions and even Red Pepperbank with Unity Trust Bank, a bank founded by the trade unions in 1984.

For savings accounts, check out Triodos. The bank also offers the Triodos Ethex that lets you buy shares in Triodos Renewables, CaféDirect and the Ethical Property Company, among others.

Islamic finance products are increasingly incorporating more SRI funds along with sharia-compliant products. Parsoli Global Islamic Equity Fund provides a diversified portfolio of equities acceptable under sharia law.

Get a green mortgage through the Ecology Building Society, who only lend on properties and projects that benefit the environment. The Co-op Bank also has a green, CAT-standard mortgage and the Norwich & Peterborough Building Society offers green options.

For students, mortgages and investments may seem very distant but you can still influence the market by encouraging your college to invest its funds ethically. See www.peopleandplanet.org for further information.This material is for general information only. Always obtain independent, professional advice before investing.