Now you CAN invest in green funds and make a big profit: Ethical stocks no longer mean pitiful returns
Ethical or green funds have earned a terrible reputation. Performance on some of them has been diabolical as savers have missed out on some of the stellar returns from companies which the funds aren't allowed to invest in, such as tobacco stocks and banks.
Its forced investors to make a choice: have a decent return or a clean conscience. But in recent years the performance on some ethical investments has driven buyers into a rethink, to such an extent that a recent analysis by TD Direct Investing discovered that of the of 25 best-performing British funds over the past five years, three were ethical.
Michelle McGrade, chief investment officer at TD Direct Investing, says: 'In the past the people running firms trying to make the world a better place tended to wear socks and sandals, and had beards.
Turnaround: in recent years the performance on some ethical investments has forced investors to have a rethink
'But now these people are businessmen, meaning firms and investors are making more money.'
Ethical funds were introduced in the 1980s to allow those with religious beliefs to invest their money without worrying it was being put into 'sin stocks' such as alcohol, tobacco, pornography or weapons.
While some still adopt this approach, others will happily invest in, say, oil companies if they can demonstrate they have a good record on the environment or human rights.
Historically, though, they have not proved popular with investors, who have just £11billion invested in ethical funds compared to £989billion invested in total.
Experts suggest this could be because investors believe the returns will be lower if they rule out big multi-national corporations.
The highest ranking fund on TD's list, at number 12, is the Royal London Sustainable Leaders fund, which has turned £10,000 into £21,880 in five years.
Mike Fox, the fund's manager, says: 'We're really looking for businesses that have good environmental, social and governance policies.'
One of its stock picks is property developer St Modwen, which redevelops run-down urban areas. A recent project is the new £450million, 65-acre campus for Swansea University on disused BP sites.
Kames Ethical Equity was the 14th best-performing British fund on TD's list. It has turned £10,000 into £18,870 in five years. The fund's manager, Audrey Ryan, says: 'We're very strict about what we invest in. We won't touch alcohol, tobacco, armaments, pornography and our fund is strong on animal welfare as it is important to many ethical investors.'
But 56 per cent of the fund is in FTSE 100 firms, she adds.
Standard Life Investments UK Ethical was the 23rd best-performing fund over the past ten years.
It takes a more unusual approach to the screening of companies in that it polls its investors each year. It then uses this to decide which firms it will invest in and which firms it will avoid.
Its approach means its definition of what is ethical can change depending on how clients feel. This is why investing in ethical funds requires you to do more homework.
Off limits: Ethical funds were introduced to allow those with religious beliefs to invest without worrying if it was being put into 'sin stocks' such as alcohol, tobacco, pornography or weapons
As an example, the SLI fund can invest in banks, much like Royal London Sustainable Leaders. One of its picks is Virgin Money, the challenger bank born after the collapse of Northern Rock.
SLI's manager Lesley Duncan says: 'Our investors have been relaxed about us investing in banks. But we make sure we get complete access to the loan books of banks before we invest.'
While ethical funds may seem like a niche, there are 64 on offer. Darius McDermott, of research firm Fund Calibre, picks EdenTree Amity UK, which launched in the 1980s to manage money for the Church of England.
It has turned £10,000 into £17,790 in the past five years.
McDermott says: 'Not having big firms in your fund can hurt you if the banks and oil companies are doing well, but it can also help you if they aren't.
'These figures go to show you can make good money in ethical funds.'