Fair shares: the heart of the matter

When investing your money, good intentions are not always enough. The corporate world is a jungle and stock dealing is where the undergrowth is thickest. But, now more than ever, help is at hand to keep you on the side of the angels.

No one way round this problem is to take a conscious decision to invest on moral lines. Not many of us like the idea of investing in a company that experiments on live animals or develops genetically modified foodstuffs. But the nature of modern corporate business makes it easy to do so.

Multi-national, diversified, taken over, amalgamated, merged; even getting a clear idea of just which areas of commerce a big firm is involved in can be difficult. The problem gets worse if you are investing into a collective fund - a unit trust perhaps, or a pension plan.

Most of these "collectives" have quite widely defined investment remits. Some of the most popular examples fall into categories such as "UK growth" or "high income". When you invest into one of these, you give the fund manager absolute discretion as to those shares held within the relevant category.

Keeping track off just which shares a fund has bought or sold is hard enough, but knowing if those firms' business activities meet your standards on ethics and the environment is practically impossible.

One way round this problem is to take a conscious decision to invest on moral lines. "It is an option which more and more of us are taking," explains independent financial adviser (IFA) David Aaron.

"To talk about an ethical movement in the investment world is not an understatement. This was once regarded as a somewhat cranky, minority interest, But now it is very mainstream. Not only is there a wide choice of funds, but their performance can be strong. Better still, they are also available through a wide range of retail financial products."

These products include unit and investment trusts, personal pensions, additional voluntary contributions (AVCs), endowment savings plans, private client stock broking and ethically run personal banking facilities.

"What this means is that an ethically or ecologically minded investor can find acceptable financial products to meet all of their main requirements from building up a pension fund to paying-off a mortgage."

But what exactly makes an ethical investor? According to Karen Eldridge, of the Ethical Investment Research Service (Eiris): "This used to be an easier question to answer than it is today.

"Not so long ago, ethical investment was largely about avoiding certain business areas like gambling, tobacco, alcohol and pornography. These were the so-called sin stocks, deemed to be morally unacceptable as part of an ethically defined portfolio. Now, I would say, ethical investors use a variety of methods which can be combined to meet their goals. These include screening, preference and engagement."

Screening involves selecting companies according to whether they are identified by certain positive or negative criteria. These criteria identify business activities which an investor would either wish to avoid or positively invest into.

One common example of a negative screen is any involvement in the manufacture or distribution of arms and weapons. By contrast a common example of positive screening is to discover whether a firm has any involvement in energy conservation.

All ethical and ecological funds use at least some screening, whether negative or positive. Once applied, these create the "investment universe" or range of shares from which the fund manager chooses those, which they will buy and sell.

From an investor's point of view, screening is a very useful tool. It makes fund avoidance and selection very much easier.

"But some industries and types of business are just not very easy to screen," says Ms Eldridge. "Behind this there is another issue; how far does simply avoiding a business activity serve to improve or change it in any way? In some cases, the answer is not at all."

The preference approach has developed as a response to this. It ranks companies on how well they meet an ethical or ecological investment policy schedule, opting to invest, where possible, in those companies which shape up the best.

It is often known as a "best in class" approach. "The point here is to find a management team which can admit it may have a problem but wants to sort it out and improve matters," observes Richard Singleton of Friends' Provident, which manages the largest UK ethical fund.

Ethical investors can also engage with companies in the hope of improving their performance, often around a specific, definable issue such as pollution or fair pay. One of the most commonly used routes to achieve this is to engage in "shareholder activism". Because a directly owned share holding allows you to attend a company's annual general meeting, you can use it to make a public complaint about that firm's policies.

Such engagement is often linked to the notion of socially responsible investment (SRI). SRI issues tend to be located around pollution, sustainable use of resources and other environmental questions. But they can also have a human rights dimension.

`The Independent' has published a free `Guide to Ethical Investment'. This 20-page guide, sponsored by the David Aaron Partnership, has a wide range of information on ethical investment and finance. For a free copy, write to:

The David Aaron Partnership,

Shelton House, Woburn Sands,

Milton Keynes, MK17 8SD.

Alternatively, phone 01908 281544