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What is ethical investing?
Ethical investing is just like any other type of investing, be it in funds, shares, bank accounts or otherwise, except that the company that invests the money for the consumer undertakes not to use that money to fund certain activities or behaviour that are believed to be harmful to the environment, to people or to animals and wildlife.

This may mean, for example, that a fund management company will not purchase shares in arms companies or firms that develop harmful pesticides, or that a bank will not lend money to or otherwise facilitate business for such companies. Ethical investment is rising in popularity and people are placing even more importance on knowing exactly how their money is being invested

Financial companies that practice ethical investment may not focus on such negative criteria, but positive criteria instead, meaning they will seek out businesses that benefit the environment or the community. The range in policies is sometimes labelled by colour: a 'light green' company will avoid businesses whose actions or products are harmful to the environment, while a 'dark green' company will actively seek out enviro-friendly or community-based businesses to invest in.

An increasingly common term for ethical investing is 'socially responsible investing', or SRI which focuses on the positive rather than the negative, and instead of blacklisting entire industries, it prefers to pick the company within the industry that is doing the most to improve its business practices, and give that company encouragement in the form of investment. This positive reinforcement is seen as more likely to improve business practices overall.

It's important to remember that even though you may not directly invest your money - ie by buying shares - you may be indirectly investing it via a mortgage, pension or savings account, and by investing ethically you can have a say in what sort of activities your money supports.

It is also important to know that the term 'ethical' is largely self-awarded - there is no standard to which companies must conform before they can label themselves ethical. Organisations such as EIRIS, the Ethical Investment Research Service, provide information into companies' ethical behaviour for independent investors, fund managers and charities alike.
How do you know if a company is ethical?
Companies have different approaches to defining ethical.

It is possible to find out which UK or global companies have ethical policies by searching their websites or company literature.

Most companies provide information about their business practices and their activities so you can see how ethical they are compared to your own views.

As a conscientious investor, you are encouraging companies to take a more responsible attitude to human, animal and environmental rights by investing in funds that search for financially strong ethical companies.

Your investment money is indirectly used by the company so it can grow.

The first thing you should remember when assessing the ethical performance of a company or an ethical fund is - there is no such thing as a perfect company. All are involved in activities which someone somewhere will object to; none goes far enough in terms of positive social contribution to satisfy all of the people all the time. Ethical investment is about compromising and prioritising.

When constructing an ethical portfolio or choosing an ethical fund the first thing is to think through your concerns. You should decide which activities you are concerned about, and whether you want to avoid or support certain company activities.

Below are examples of a number of issues of concern to many ethical investors:

Companies operating in oppressive regimes, breaking environmental regulations, testing products on animals,
developing genetically modified crops and/or manufacturing tobacco products

EIRIS, the Ethical Investment Research Service, provides the research into corporate behaviour needed by ethical investors, helps charities and other investors identify the approach appropriate to their requirements, publishes guides to help investors and advisers identify and choose between funds with ethical criteria, enables each investor to create a portfolio that reflects their own ethical concerns, offers services for all types of client, from checking a portfolio to creating and implementing an ethical investment policy, concentrates purely on ethical research and does not offer financial advice or investment management services.

Ethical Investment Research Service (EIRIS) & EIRIS Services Ltd
80-84 Bondway, London. SW8 1SF
How do funds define ethical?
Fund managers have different ideas about which companies would be the most socially responsible and ethical, while providing good returns.

Managers can select their stocks in a variety of ways, so it is worth bearing this in mind when deciding which fund would best suit you.

Negative Criteria - Some funds actively screen out companies listed on the UK or other global stockmarkets that are involved in businesses such as tobacco production, deforestation, the arms trade and animal testing. Positive Criteria - Other funds prefer to use positive criteria such as looking for companies that produce things to help the environment, such as sustainable energy or recycling companies.

Engagement - Other funds "engage" with companies by using the manager's power as a shareholder to push for changes to the way it deals with human rights, the environment and corporate governance issues. This means managers will not screen against a good-performing company to the disadvantage of investors, but will try to influence the company for good.
Performance myth
One myth perpetuated about ethical investing is that the investment will not do as well as mainstream funds because these funds cannot invest in certain companies included in for example the tobacco, gambling and arms sectors.

However if you look at the statistics ethical funds have performed well over the years even with the strict screening policies that cost money to administer.

As the World Trade Organisation begins to crack down on companies exploiting people, animals or the environment, companies tainted by fines and negative press may start to under perform. Ethical investment may be a more attractive choice for many.

Well-run companies with strong ethical principles will not be tarnished by future problems.

In fact they are more likely to be tomorrow's top performers, along with the many companies producing sustainable energy products that will shape the way we live in the future.

Organisations such as the World Trade Organisation and Eiris (the Ethical Investment Research Service) and UK Socially Responsible Investment Forum (UKSIF) can provide more information about ethical investment.
What ethical products are available?
Probably the best-known ethical bank is the Co-operative Bank, which claims to be the only high-street bank that gives its customers a say in how their money is used. The Co-op ensures compliance by making new business customers fill out an Ethical Policies questionnaire, which is assessed by the bank before agreeing to provide business services.

The Co-op's Ethical Policy covers human rights, the arms trade, genetic modification, animal welfare, ecological impact, global trade and corporate responsibility. In addition to ethical investment on a global scale, the bank is involved in local community projects and engaged with issues such as low-income households' costs of credit.

The Co-op offers the full range of banking services and products, including accounts, loans, charity credit cards, mortgages, investments, insurance and pensions.

Online provider Smile, part of the Co-op Bank, is included in the Co-op's ethical policy and offers a current account with higher account interest and lower overdraft interest than the high street banks.

Triodos Bank offers several savings accounts with a difference: customers can target their funds to help specific causes, such as human rights organisations, social housing or environmental causes, depending on which account they choose.

The high street banks generally have a less rigorous approach to ethical banking and investment. However, many are looking to provide options for customers seeking an ethical option, often in the form of credit cards that benefit charities. Charity credit cards usually pay an initial donation to the charity when the card account is first opened, then donate a small amount for each denomination of money, usually 100GBP, spent on the card.

The Royal Bank of Scotland offers customers the option to support the Royal National Lifeboats Institute or the Woodland Trust. Customers of the Bank of Scotland can donate to Mencap, Cancer Research UK (Scotland) or the Scottish Society for the Prevention of Cruelty to Animals, and Nationwide's card benefits Comic Relief. Investments and pensions

Since 3 July 2000, all UK company pension fund trustees have been required to disclose their ethical policy. This does not, of course, mean that schemes are required to have an ethical policy, but simply that it is now easier for employees to evaluate their pension funds and influence their funds' ethics. Employees can band together to make themselves heard and influence how their money is invested.

If you are setting up your own stakeholder pension, you will have fewer ethical funds to choose from than regular funds, but the market is still large enough to provide consumers with choice through providers such as Axa, Friends Provident and Standard Life.

Those with more money to spend can invest in a standard personal pension, which offers greater choice of funds but usually costs more than a stakeholder plan.

As for investors, Friends Provident's Stewardship Fund is the original and perhaps the best-known ethical investment fund. The full range of Stewardship Life and Pension funds share Friends Provident's ethical policy, but different funds focus on different sectors: some UK and some global.

However, Friends Provident has by no means cornered the market - most investment companies offer at least an ethical fund option, from Aberdeen Asset Management to Insight Investment Management's Evergreen fund and Standard Life's UK Ethical fund.

If you own shares in a company, it pays to keep abreast of its activities: read annual reports, study the business pages and let your fund manager know if you are unhappy with its activities.

People seeking an appropriate fund to invest in must remember that the value of investments can go up or down and is not guaranteed; it is important to seek the advice of an independent financial advisor when choosing an investment vehicle.

Some financial advisors specialise in ethical investments. EIRIS offers a directory of ethical financial advisors, as well as a guide to choosing an IFA. Ethical power providers
Online bank Smile not only provides ethical products for its customers: it uses them for itself, and claims to source 98% of its electricity from renewable sources.

It's possible for consumers to be equally ethical with their choice of power provider, and because the industry is regulated by OFGEM, all companies are required to maintain a reliable supply. Good Energy supplies only fully renewable energy sourced from wind farms, solar power and hydro plants. Ecotricity concentrates its efforts on building wind farms to supply clean energy, and plants a tree in the Ecotricity Forest in Gloucestershire for each person who switches to their company.

Green Energy UK seeks to ensure that 'green' energy costs the same as non-renewable energy and offers a 10% green option that costs the same as your regular supplier, and a 100% green option that costs slightly more.

Gas and electricity supplier Ebico is run on a not-for-profit basis and uses wealthier direct-debit customers to effectively subsidise poorer households on prepay and quarterly billing plans.

Sources: bbc.co.uk, moneynet.co.uk, greenconsumerguide.com, the guardian.

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