Socially responsible investing

Just as you can now choose from a range of green or ethically produced goods in your supermarket, you can also choose financial products that have positive benefits for the environment and ethical concerns.

With the threat of gas and oil shortages pushing up prices and the Government continually launching new initiatives to promote the use of energy-efficient technology, some investors may be wondering whether it's finally time to invest in green or ethical funds.

Great things have been expected of ethical investing since the launch of the first fund aimed at mainstream investors, the F&C (formerly Friends Provident) Stewardship Growth Fund, in 1984. But despite occasional bursts of interest from investors, the sector as a whole has never really taken off. Overall performance of many ethical funds over the last 20 plus years hasn't outstripped that of the FTSE All-Share Index.

What would be ideal is to have a fund with great performance that is ethical too, but this can be difficult to achieve when a fund isn’t able to invest in assets or sectors that are driving growth at a certain point in time. Tobacco stocks are a good example, being up almost five fold since 2000.

It can also be difficult to construct an investment portfolio that will replicate the ethical beliefs of an individual investor, as ethical funds tend to adopt different investment criteria; what one fund may consider an ethical stock another might not, so some funds will not hold shares in oil companies because they are harmful to the environment, while others will hold oil companies that they consider 'best of breed' and think will cause less damage, or are proactively looking for greener solutions.

Adequate diversification is also a problem, which is why ethical portfolios can be volatile. Typically, some sectors such as tobacco are avoided altogether and there are often lower weightings in other sectors like oil and gas. This means there is a tendency to focus almost exclusively on the sectors that fund managers feel they are able to invest within and their comparative performance is often dictated by how the sectors they hold actually perform.

The performance of some ethical and green funds has been undeniably volatile and variable. Many of Britain's largest ethical funds have delivered relatively lacklustre performance and have been something of a disappointment to investors – there are plenty of ethical and green funds lurking in the bottom half of their sectors - yet a closer look at the socially responsible arena reveals that this could still be a market segment worthy of consideration.

The FTSE4Good index tracks the performance of UK companies that meet globallyrecognisedstandards of corporate responsibility and although some ethical investors do not feel this index is green enough, because some oil companies are included, this index delivered positive returns to the tune of 13.7%*over the past 12 months - even better than the FTSE 100 index which produced a gain of 11.65%* - demonstrating that ethical investment does not always mean sacrificing investment returns. (Source: FTSE website as at 19th March 2013)

Most ethical funds are available via ISA and some can be accessed via pension funds, meaning that socially responsible investment does not mean sacrificing the tax advantages available.

If you feel that your money should be invested as ethically as possible, then discuss your options with your independent financial adviser. He or she will be able to construct a portfolio of socially responsible funds that match your investment needs in a tax efficient manner without compromising your beliefs or green credentials.

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