'Ethical cleansing': your cash has principles

The cost of a conscience used to weigh heavy on your finances. To make an ethical choice, across any part of your personal finances, it used to be the case that you had to take a firm moral line and stick to it.

The only "moral" investment funds, for example, were ones that rigidly avoided highly profitable oil and arms companies. And if you wanted green electricity, there was just one, expensive, supplier. At the end of all this, consumers were rewarded with little except a hefty bill for their efforts.

Today, however, you can now turn nearly every part of your finances green without narrowing your horizons. Be it a current account with a bank that refuses to lend commercially to companies that deal in arms or pollute heavily, or a fridge freezer that pumps out a minimum amount of heat, consumers can take their pick of green goods.

There is still a price to pay in striking a balance between your principles and what you are prepared to give up financially, but the wider, and growing, choice of products is helping to foster competition.

And there's plenty of demand, according to the latest figures from the Co-operative Ethical Purchasing Index. Some £10.6bn was placed in ethical investments or deposited with ethical banks in 2004, it shows.

Here we see what you can do to "ethically cleanse" your finances.

Current and savings accounts

For day-to-day banking, opt for one of the "ethical banks" that have strict criteria for lending money commercially. The Co-op Bank won't deal with arms traders or those companies that "needlessly pollute" the environment, it says, while Triodos Bank only lends to organisations that benefit people and the environment, such as those which invest in organic farming.

The choice of accounts is still fairly limited, though, and rates aren't the most competitive. The Co-op pays no interest on current account credit balances, although it does offer a mini cash individual savings account (ISA) paying 3.68 per cent on balances up to £2,999, and 4.18 per cent above this - both below the Bank of England base rate.

Triodos Bank pays 3.75 per cent on its cash ISA.

"[Green] mini cash ISA rates are generally reasonable but will rarely trouble the 'best buy' tables," says Justin Modray of independent financial adviser (IFA) Bestinvest.

Investments

Today, with the wide choice of "socially responsible investment" (SRI) funds, you can opt to be as green as you wish.

Each fund has its own approach to what being green means, so find one that matches your own view of environmental and ethical importance.

"Light green" funds avoid companies that harm the environment and ones that produce tobacco or arms, while "dark green" funds invest in companies devoted to green business practice, such as the rejuvenation of derelict land.

You can now choose from more than 60 funds.

Due to their social agendas, ethical funds will struggle to beat the FTSE All Share Index in the longer term, warns Mr Modray. "The manager has his hands tied," he says - and much will depend on the "green screen" used by the fund and how many activities are judged unacceptable and filtered out.

Today, instead of turning their backs on oil companies, many light green funds invest in those that are doing the most to invest profits in renewable energy sources - giving a big boost to fund performance.

Mr Modray recommends F&C's Stewardship growth and income funds.

It is also worth nothing that ethical funds tend to have a natural bias towards medium-sized and smaller companies because, relatively, there simply aren't that many green businesses to invest in. This can lead to a less diversified and riskier portfolio.

Try the Ethical Investment Research Service at www.eiris.co.uk for fund information.

Pension

If you have a personal pension, the ethical nature of your fund is up to you.

"A self-invested personal pension or stakeholder gives you complete freedom to select [the underlying investment fund or assets] in accordance with your ethics," says Tom McPhail of IFA Hargreaves Lansdown.

For those in an occupational scheme, however, it's not so straightforward: pension trustees are in charge of the fund's investment mix.

Find out whether your scheme has an ethical stance by asking to see the trustees' Statement of Investment Principles.

Even if there's no ethical option in the case of either a final salary or defined contribution scheme, "go to your employer and ask if one could be made available - schemes can be adapted", adds Mr McPhail.

Child trust fund

Principled parents can now put the Government's £250 nest egg for their children into an ethical account. The Co-operative Insurance Society provides a low-cost stakeholder fund linked to the FTSE4 Good tracker - an index of ethical stocks - while the Children's Mutual offers a non-stakeholder fund, Insight European Ethical.

However, "neither account is particularly inspiring", warns Philippa Gee of IFA Torquil Clark. "There is not much choice for parents at the moment."

Utilities

It is easy to switch to a "green" electricity supplier such as Ecotricity, Good Energy or Green Energy UK, all of which use renewable sources such as wind, wave and solar power.

"If you have never changed your electricity supplier before, switching to a green supplier will either work out the same or cheaper," says Tim Wolfenden at the uswitch.com website.

However, those who have already switched provider may end up paying more for changing again to a green product.

Consumers can also be more efficient in their water use. "Switch to a metered supplier and pay for what you use," says Mr Wolfenden. "Many people will make savings by doing so."

Appliances

The average household could cut its annual fuel bill by £250, says the Energy Savings Trust, by adopting its measures - see the graphic opposite. Visit www.est.org.uk or call the Energy Efficiency Advice Centre on 0800 512012.

Financial help

You may be entitled to grants worth up to £2,500 from government, energy suppliers and local authorities to help you install energy-saving measures such as solar panels.

The sum offered will depend on your personal circumstances, age and where you live, though it is not restricted to low earners. Apply via www.est.org.uk.

Car

Although car-sharing with friend and colleagues is the time-honoured way of cutting back on emissions, you could also look at purchasing an "eco-friendly" low-emissions car such as the Toyota Prius.

Its hybrid engine is powered by a combination of electric and petrol power, and uses less fuel. At low speeds, it can run entirely off its electric motor.

'Committed to transparency'

Philip Angier chose a Smile current account [the online arm of the Co-op] for its social values. "I have always agreed with the Co-op's stance on human rights," says the 55-year-old independent business consultant from Newcastle.

"The bank is committed to transparency and upfront about how its customers' money is used."

But Mr Angier says he is also attracted by the "convenience" of the internet account: "I wouldn't opt for an ethical bank unless it offered this too."

On a wider scale, he applies his ethical approach to all areas of his personal finances.

"I try to choose socially responsible investments for my pension and investments," says Mr Angier.