Ethical savings: Cash investors find the returns are comparable

Not everyone agrees, but last year 34% more new money was invested. Alison Shepherd reports

Ethical investing is fast moving into the mainstream, no longer the preserve of those hardy souls willing to put principles and respect for the planet above profits and cold, hard returns.

The growth of the market in the past decade – with more than 100 products, from ISAs, to unit trusts and pensions, now offering a responsible or sustainable element – has opened up the sector to those who have only tens of pounds to spare per month or hundreds of thousands.

At the start of National Ethical Investment Week, new figures from the Co-op show that the amount of cash invested in ethical financial products has had its biggest annual increase in a decade, rising 34 per cent last year from £14.3bn to £19.2bn. The increase outstripped the mainstream finance market – which grew 15 per cent – over the same period. The report adds that the average UK household now has almost £750 tied up in ethical funds and savings accounts.

"Investors come from all walks of life," says Julian Parrott, the chairman of the Ethical Investment Association, "and the perception of the 'hippie' green and ethical investor is just a stereotype. Just like Fairtrade coffee, ethical investment is entering the mainstream and is an important part of the growing ethical consumer movement. The significant growth in investment opportunities means that there are sufficient investments both for those clients who just want to dip their toe in the water and for those who want to create a fully ethical portfolio."

A recent survey showed that more than 80 per cent of financial advisers deal with green and ethical products, although many still had concerns about their performance relative to more mainstream investments.

Nick Scarrett, the head of pensions and investments for the Fair Investment Company, an online provider, is one who has still to be completely convinced of the relevance of ethical investments for the majority of investors.

"Most people are looking for the best overall return for their money with minimum risk," he says. "Funds that do not include BP or Rolls-Royce or BAE are difficult to recommend to someone who is risk averse. People on the whole still tend to go for income over ethics."

Mr Scarrett's company was awarded one of only two five-star ratings in a recent mystery shopper exercise to identify which fund supermarkets and discount brokers best facilitate green and ethical ISAs. UK Sustainable Investment and Finance, the organisers of the National Ethical Investment Week, awarded the other five-star rating to Smile, the Co-op's online bank.

The perception that performance is a compromise you have to make to keep a clear conscience is widespread, but according to the Investment Management Association, the return on ethical funds is comparable to those in the mainstream.

"It is true that with equity bonds performance is different for ethical funds in the short and medium term," says Robin Keyte, a director of Towers of Taunton, an IFA, "but over the longer term there is no performance cost, as income yields are broadly similar. And the levels of risk that people are comfortable with can be accommodated."

For his more cautious clients, Mr Keyte recommends ethically screened corporate bond funds such as those managed by F&C, Aegon, Aviva's Sustainable Futures, Standard Life and Rathbone. Screening includes an analysis of such things as the effect an industry has on the environment, a company's track record on social and environmental issues and the geographic regions where it operates.

"These are all investment-grade funds. Aviva, for example, has BB and B ratings, so slightly higher risk than some other more mainstream options, but with returns to match."

Although such funds are suitable for those with a lump sum to invest, families wanting to save smaller amounts of cash have a choice of stocks and shares ISAs or unit trusts, such as Legal and General's ethical unit trusts which have a minimum investment of £20 a month.

And then there are the cash ISAs offered by the Co-op and Triodos banks and Ecology Building Society, which use the money on deposit with them to fund socially and environmentally beneficial projects at home and across the world, such as investment in renewable energy schemes or sustainable housing.

"Interest rates on these may not be in the best-buys, but they are not that far off," says Mr Keyte. "And, aside from these, anyone who wants to save ethically should choose building societies, which, with their long historical links with the mutual movement, are preferable to high-street banks."

Another product area that has seen a marked increase in ethical offerings is pensions. "Unusually in my line of work, I have embraced stakeholder pensions, a number of which offer ethical funds," says Mr Parrott. He and Mr Keyte recommend Friends Provident's stewardship funds, Aviva and Aegon, all of which are ethically screened. And the same providers are mentioned for personal pensions, for individuals contributing between £150 and £200 a month.

For those with a higher than average income and who are comfortable with riskier investments, there is always the option to invest in a single company or sector such as sustainable fuels or technologies.

"Such investments can offer flavour and spice to a significant portfolio," says Mr Parrott, "but you can get carried away with altruistic enthusiasm and you really need to remain pragmatic. To be successful, you need to know the market inside out or be advised by those that do. There are some areas, such as a few interesting wind-farm co-operatives, that will stand up to investigation in terms of liquidity, protection and risk levels, but you have to be careful."

And experts expect it to continue to grow. Many suggest that banks will use a new-found ethical stance to win back the trust of customers that was damaged during the credit crunch. They also hope that if the Government follows through with its promise of a green investment bank, then a green ISA scheme to fund it may not be far behind. "A green ISA will make it far easier for average savers to use their savings ethically," says Stephen Hine, the head of responsible investment development with Eiris, the non-profitmaking ethical research service. "It happens in Belgium and is very successful. It is putting it in front of people who want to take an ethical stance."

Expert View

Robin Keyte, Towers of Taunton, IFA

The only real limiting factor to the growth of ethical investment is mutual ignorance: the ignorance of financial advisers not familiar with the area and the ignorance of consumers who don't realise that such products are available and as good as their mainstream rivals. As more of the public see that the same sort of awareness that leads them to buy Fairtrade products can be applied to their finances, the more the right sort of financial products will become available for them to invest in."