Industry voice: Ethical is not a dirty word

Ethical investing does not have to mean diminished returns, just different ones. Sometimes market conditions will prove favourable for ethical products, while at others they will work against them.

In the current environment, several ethical funds are outperforming wider equity market returns. This is due to the fact ethical funds often exclude many large caps, and as such, place greater focus on small and mid-cap stocks. With these stocks leading the current rally, ethical funds have flourished accordingly.

An interesting trend emerging is investors buying into socially responsible funds to play specific, non-ethical themes or trends. This is perhaps easier to understand when considering the 'purer' portfolio focus ethical screening criteria can indirectly give.

If an investor expects strong UK domestic growth, for example, well ahead of other developed economies, then an ethical fund could benefit handsomely, as it tends to screen out areas such as big oil, pharmaceuticals, tobacco and mining.

These sectors tend to include major global corporations, deriving much of their earnings internationally, and as such, might be expected to lag domestically focused companies, operating in a strong economy.

But just how ethical is an ethical investment? While 'dark green' funds tend to use strict exclusion criteria, 'light green' funds are normally less rigid, often adopting a more affirmative approach, investing in companies that make positive ethical contributions, such recycling or renewable energy.

However, between these two ends of the spectrum, there are myriad screening criteria, methodology and policy, representing varying levels of ethical flexibility or rigidity.

For example, a fund might be considered very dark green, with strict exclusion criteria across a host of considerations. If it has no policy on sustainable timber, however, an investor whose sole concern is the depletion of global rainforests might be far more ethical in choosing a far less stringent fund - but one committed to forest regeneration and sustainable harvesting practices.

Essentially, investors must do their research to ensure their particular area of concern or ethical view is being addressed.

In summary, ethical investing has emerged from the fringe and moved into the investment spotlight. And with mainstream exposure comes greater, more diverse investment choice, appropriate for any range of investor risk/return profiles.

This, together with an ever-growing awareness and concern for global ethical issues, means investing with a conscience needs no longer be an investor's little secret.