How to stop your cash being used for weapons

More people than ever are putting their ethics ahead of profits when it comes to their finances, as Simon Read reports

The number of people putting their cash into ethical savings or investments has soared in the past year, according to the Co-operative. The total amount invested ethically climbed 34 per cent to £19.2bn, up from £14.3bn in the previous 12 months. The figures come ahead of the annual National Ethical Investment Week which starts tomorrow.

The week is an attempt to spread the word about green and ethical investing. The organisers want to ensure that everyone knows that they have ethical options when it comes to their finances. But if you choose to turn your finances green, are you making a wise decision?

No, says Patrick Connolly of the advisers AWD Chase de Vere. "The over-riding considerations for investors remain maximising returns and effectively managing risk; investing ethically can have a negative impact on both of these," he warns. "The best managers don't tend to manage ethical funds, putting these funds at a disadvantage regarding potential performance."

In other words, if you invest ethically, you'll have to accept lower potential returns, Connolly believes. But those attracted to the idea of ethical finances are happy about that. They prefer to know that their cash isn't being used to fund terrorists. animal testing or genetic engineering. Depending on your moral stance, it can be important to know that you're not indirectly backing the alcohol, tobacco or gambling industries, for instance.

"The term ethical refers to a more diverse range than ever before – from the environment to gambling, tobacco to GM foods," points out Adrian Lowcock, senior investment adviser at Bestinvest. "For some people investing ethically means avoiding companies which damage the environment, while others are considered socially unacceptable. Socially Responsible Investing has been a more recent development, with investors looking for companies working to improve their business model and reduce carbon emissions or improve working conditions."

There are different types of ethical funds, which reflect how hardline they are. Some actually invest in hated oil companies or banks, with the notion that doing so can help to persuade the big multinationals to curb some of their more harmful business practices. Other funds exclude any firms that are involved in dubious practices and even go so far as to invest only in companies that make a contribution to the environment or society.

Because of the different approach of funds, the environmental financial adviser Barchester is calling for kitemarking for ethical funds. "It is time to introduce an official kitemarking scheme so that investors can easily identify the truly green and/or ethical funds and invest their money according to their requirements," says Jonathon Clark, director of Barchester. "There are many 'light green' funds which are not easily distinguishable from 'dark' or truly green funds, which are exactly what they claim to be.

"The latest figures from EIRIS show that investment into ethical funds has hit a record high of £9.5bn in the UK, illustrating clearly a strong growth in consumer demand for ethical and environmental products. It is vital the investment industry is able to demonstrate, unequivocally, that the funds offered are all they claim to be."

Of course, it's not just investments that can be linked to ethics. Banking can too, points out Huw Davies of the ethical bank Triodos. "Recent years have seen a rise in ethical consumerism, from fair trade coffee, to green electricity," he says. "Increasingly, and especially since the credit crisis, the public is also asking questions of their banks. How are they run, what do they do with savers' money, what alternatives are there? Ethical banking and investment offers an alternative, so that customers know their money is not doing harm, while still generating a decent return for them."

In fact there's been a massive growth in the popularity of ethical banking, according to Co-operative figures. Over 12 months, the amount of cash flowing into ethical banks increased 31 per cent, from £6.8bn to £9bn – compared to just 4 per cent increase for general banking deposits. Ethical banking includes money held in deposit and current accounts with financial institutions that refuse to support businesses involved in certain types of industries.

You can even go green when buying your home, reports Melanie Bien, of the mortgage broker Private Finance. "If you are renovating a derelict or dilapidated property or using sustainable materials to build, the Ecology Building Society is worth a look," she says. "It specialises in funding properties that respect the environment."

The rates charged at the society aren't the most competitive: its standard variable rate, for instance, is 4.9 per cent. But there are discounts for those who have been customers for some time or have particularly energy-efficient homes. Another option is Norwich & Peterborough's green mortgage, available to those building their own home. The lender will plant 40 trees, making your home carbon-neutral, when you take out a five-year fixed rate which has a rate of 6.89 per cent and a maximum loan of 75 per cent of the completed property value.

"The Co-operative Bank is also known for its ethical stance," says Bien. "It offers an Energy Efficient Advance to customers wishing to borrow additional money (up to £20,000) in order to buy and install energy-efficient home technologies, such as double-glazing or cavity wall insulation."

Case study: The Rymers

Making our finances as ethical as us

Jacqueline and Christopher Rymer have started putting £50 a month into ethical ISAs. "We both believe there's going to be an environmental revolution," says Jacqueline, 31, a teacher from Manchester, pictured above with Christopher and their dog, Alfie. She saves into the Co-operative's Sustainable Leaders Trust, while Christopher's money goes into the Sustainable Diversified Trust.

The couple are both trained building surveyors and strong supporters of regeneration. "From our professional background we believe we'll be better off over the long-term by saving ethically," says Jacqueline. "We know that saving is essential for us. My retirement age is going to be 68, so this is the start for us building a nest-egg which will hopefully give us options later on."

The couple are using ISAs rather than pensions as they know they can get at the cash if they need it. "We went with the Co-op because, unlike most financial institutions, they do contribute to society, which is important to us. For instance they support local businesses, which is essential – small business is the only way to regenerate local areas."

The pair put their green beliefs into practice in their home. The bookshelves pictured behind the family were made by Christopher and Jacqueline from old scaffolding planks that Christopher was able to recycle from his work in the construction industry.

"Our view is that the only way forward is environmental – the planet won't last unless we do something about it. So we want to make our finances as ethical as our lives," says Jacqueline.

In the future, when they can afford it, they plan to put cash into property. But in the meantime they're banking on ethical funds to give them decent returns.

Case study: Emmeline

Money should be used to help, not harm

Emmeline Pryde runs her own medical practice business in Bristol. The 28-year-old has this year put £5,000 into an online cash ISA with the ethical bank Triodos. She has no pension or other savings so when she saved for the first time, Emmeline wanted to ensure that it was with the right company.

"I looked at other ISAs, and some offered better interest rates, but I'm trying more and more in every aspect of my life try to be fair trade and ethical," she says.

"I think it's important that we all take responsibility for the world around us. I always try and use renewable energy, for instance."

Triodos has set up a website at knowwhereyourmoneygoes.co.uk so that its savers and investors can find out how their money is used and what businesses the bank lends to.

"I'm reassured to know that my money is being used properly to help and that my bank has principles and ethical values," says Emmeline.

"In the long-term I think it's much more important to consider ethical issues than just chase high returns," she says. "I have no children at the moment but I may have in the future and I want to bequeath them a healthy world, not one I've harmed."

For news about National Ethical Investment Week go to www.neiw.org. For information about ethical finances go to www.yourethicalmoney.org.