Risk

Understanding the risks associated with this type of investment is equally as important to some investors as identifying the ethical areas in which you want to invest. Are ethical funds more risky than conventional funds and how is performance affected, if at all?

Performance

Traditional ethical investing, because of its negative screening methods, is often perceived as a risky investment. Dark green funds tend to exclude larger companies from their portfolio, such as oil and pharmaceuticals, areas that have been known to provide the best gains. They also invest a higher percentage of shares in small to medium sized companies, sometimes considered unpredictable investments. All collective investment funds both ethical and non-ethical have an element of risk. It can alter with your investment choice and the length of time you invest.

New ideas and approaches, the introduction of light green funds for example, are changing the way in which ethical funds are perceived. Fund managers of light green funds have a broader selection of investments to choose from. They may also take advantage of market trends, offering better potential for higher returns. Past performance suggests that some ethical funds have equalled or beaten their conventional counterparts. Although past performance is not necessarily a guide to the future, the new developments to the industry may strengthen this record.

Ethical Indices

The performance of a Unit Trust or Investment Trust is generally measured against an index, so investors can easily view the direction of a particular area of the market in comparison to their chosen fund. A conventional fund and an ethical fund may both be compared to the same index, for example the FTSE All Share Index. A conventional fund has many companies to choose from that satisfy its investment objectives, whereas an ethical fund can be restricted somewhat by negative screening. As a result some ethical funds may under-perform the benchmark they have been measured against.

Some groups have indicated a need for a suitable ethical index, while others believe ethical funds should continue to be compared with mainstream indices to dispel ideas of under-performance. The FTSE4Good indices, a series set up by FTSE and EIRIS, have generated equal amounts of praise and criticism since launch in February 2001. The criteria for stock selection include the environment, universal human rights, social issues and stakeholder relations. It is the first ethical benchmark to be set up by an independent body in the UK.

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