Is it possible to invest ethically?

Ethical investing is big. According to a recent report from FairPensions, half of us would like our fund managers to take environmental and ethical issues into account. The size of the market for such funds has trebled in just ten years. But before you join the rush, there are two questions to ask: is ethical investing actually possible and does it work? The evidence is patchy on both scores.

The basic principle is simple, and seems sound enough. Ethical funds claim to invest your money only in firms that are screened for ethical soundness. So, out go sectors such as tobacco, alcohol and anything to do with gambling – the so-called vice sectors.

The trouble is, once you’ve ditched the obvious sinners, things get a bit trickier. FairPensions notes that while plenty of funds marketed as ethical avoid these vice stocks, they still happily buy shares in others that support child labour, for example – indeed, only 11% of funds screen for this, as otherwise you’d be excluding almost every Western retail brand. Plenty of ethical funds also invest in fossil fuels and oppressive overseas regimes (via defence contractors and many commodities giants).

You might think the obvious solution would be to look up the assets that an ethical fund holds before investing. But you’ll run into problems there too, says the report, because 45% of these funds don’t publish such a breakdown.

That may be linked to the fact that only one in five consults customers about its investment mandate. The truth with a lot of ethical funds is that many are a triumph of marketing over substance.

As for performance – that’s where you get to the second big problem. Over the last five years the FTSE4Good global ethical index has underperformed the FTSE World index, and the UK version (down 5.5%) has underperformed the All Share index (down 3.3%), although to be fair it has roughly matched the performance of the FTSE 100 (down 5.6%). So ethical investing can’t really be said to be rewarding its fans in pure monetary terms.

So do any funds do what they claim? Launched in October, the Battle Against Cancer Investment Trust (LSE: BACT) is a fund of funds with a (good) twist – all the funds it selects have waived their normal fees. Manager Tom Henderson gives a 1% fee to charity, bringing the total expense ratio up to 1.2%-1.3% per year. The trust is up 2.29% since launch, and trades at a small premium to net asset value. If you’re ethically minded, it’s worth a look.