Are ethical funds really ethical?

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By Mark Mitchell
Know Your Money Editor

Ethical funds may to the average investor be a place where they can put their cash safe in the knowledge that companies involved in certain areas of business that are considered anti-social are excluded.

Some may even anticipate that environmentally pro-active companies would be included in the funds.

However, new research from specialist financial adviser, Barchester Green, has revealed that some funds invest in stocks that may be completely at odds with the aims of the average ethical investor.

The worst?

Barchester Green warned that although some funds may have "ethical" or "environmental" in their name they really cannot justify that label.

The problem for consumers could be that a number of so-called ethical funds invest in firms that may do a little towards helping the environment but not in the manner that people might expect.

One example is pensions company Zurich, which offeres a fund that it promises will invest in "companies and institutions which actively enhance the global environment and community".

But the report revealed its 7.6 per cent holding in Shell, 5.9 per cent holding in BP and a 4.3 per cent holding in Rio Tinto "would put this fund high on an environmental investor's blacklist".

What this means for the consumer is that 13.5 per cent of the £16 milllion fund is in shares in oil groups BP and Shell.

Jonathon Clark, director of Barchester Green, points out: "BP may be developing alternative energy sources but this is a miniscule part of their business compared with the pollution caused by the deepwater oil spill. How can these companies possibly be included in a fund with this name?"

He adds the remaining top ten funded business do not seem to embody much, if anything, in terms of offering environmental opportunities.

These include Vodafone, AstraZeneca, GlaxoSmithKline, Tesco and Standard Chartered, which may be ethical firms but seem to lack any obviously environmental benefits.

In a statement, Zurich said: "We recognise the interpretation of ethical and environmental investment is subjective, which is why we offer a wide range of funds, including alternative ethical and environmental options, through our investment and pension products."

It added it believes financial and non-financial considerations should be taken into account when making investment decisions to ensure its customers benefit in the long term.

However, Zurich was not alone in the report's rundown of offenders as Jupiter Environmental Opportunities - OEIC, Marks & Spencer Ethical - OEIC and ISA, Scottish Widows Environmental Investor and Prudential Ethical made up the remainder of the top five.

Although these did not fund oil companies they were criticised for investments in other areas, such as banks.

And Mr Clark of Barchester Green pointed out: "More and more ethical investors feel a general disquiet over the behaviour of the banks, their selling practices and their lending criteria."

The best?

It wasn't all bad news for those looking for ethical funds that seemingly remain close to the literal interpretation of their name.

Jupiter Ecology topped the list with the financial advisor because it is a fund that it believes meets these conditions.

"It is also one of the environmental funds which also applies ethical criteria in its stock selection," the report added.

Managed by Charlie Thomas, it is nearly £350 million in size and pursues a policy of screening out companies.

Its holdings include Danish wind power firm Vestas and United Natural Foods, the biggest independent distributor of organic produce in the US.

The IM WHEB Sustainability Fund, Black Rock New Energy Technology, AEGON Ethical Equity Fund and Impax Environmental Leaders were also termed "heroes".

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