Ethical funds hit the target with investors

There once shopping ethically marked you out in some eyes as a crank, the explosive growth in environmentally friendly, and socially aware, products means you can now turn everything green - including your finances.

There once shopping ethically marked you out in some eyes as a crank, the explosive growth in environmentally friendly, and socially aware, products means you can now turn everything green - including your finances.

Whether you want a pension, mortgage, current or savings account, electricity supplier, investment or even a child trust fund, you can make sure your cash is in tune with your beliefs.

"You can now have a complete ethical makeover," says Scott McAusland from the Ethical Investment Research Service (Eiris).

But going green, he warns, may mean compromising on cost and value. "You have to strike a balance between your principles and what you are prepared to give up financially."

That said, you do now get more bang for your green buck. "There are ethical products that perform just as well, if not better [than mainstream ones]," says Patrick Connolly of independent financial adviser (IFA) John Scott & Partners. "But there is still a long way to go."

Demand for green or ethical products, from equity individual savings accounts (ISAs) to eco-friendly fridges, has created a £24.7bn industry.

According to the latest figures from the Co-operative Ethical Purchasing Index, an extra £1.4bn was placed in ethical investments and bank deposits in 2003, compared with the year before. An additional £1bn was spent on ethical products and services such as Fairtrade goods and energy-efficient household appliances in the same year.

For daily banking, you can choose your lender according to its own ethical approach on what it does with savers' money. Many will think first of the Co-operative bank, which won't lend to the arms trade, for example. But other lenders also apply principles: Bank of Scotland says it writes off Third World government debt as long as the effect of this is not to cause undue hardship to citizens.

Triodos bank lets you channel your savings into specific projects such as investment in social housing or organic farming. Its rates can better those at some of Britain's big high-street banks, starting at 2.35 per cent on a £500 deposit. However, you will need to give 33 days' notice for withdrawals, and the interest rises to a more competitive 4 per cent only if you have a whopping £100,000 in savings.

The ethical mortgage market is still small as people have tended to be less concerned about who they borrow from than who they save with, says Eiris.

The interest rates are not as low as with conventional loans - as much as a 1 per cent higher - but the Co-operative Bank and Norwich & Peterborough building society offer green mortgages that make annual donations to reforestation schemes.

New parents with a green outlook can opt for a child trust fund from the Co-operative Insurance Society (CIS), which tracks the FTSE4Good, an index of ethical stocks. Nuclear power station operators and uranium miners are excluded by CIS, though the trust fund does invest in the drugs company GlaxoSmithKline.

Meanwhile, green power is now easily available and could save you money if you're prepared to switch electricity supplier. Visit energywatch.co.uk for help in your search.

Just how green you want to be as an investor is up to you: each socially responsible investment (SRI) fund has its own approach. Those with a "light green" tag avoid companies that harm the environment, breach human rights or produce tobacco or arms - though they include oil companies. Their "dark green" counterparts invest solely in companies devoted to green business practices such as rejuvenation of derelict land.

There are now more than 60 ethical funds, but as they pick stocks from a small basket, the performance of many has suffered in the past. However, this isn't always the case now: £1,000 invested via an ISA in the average UK ethical fund a year ago would now give you £1,152 - almost the same as a standard UK equity fund at £1,154 - according to the Standard and Poor's ratings agency.

Check any fund's performance over at least one and three years before you buy. Stephen Marriott of IFA Best-invest recommends the F&C Stewardship Fund, which has been around for over 20 years.

If you pay into a company pension scheme, you may worry that your money is invested in businesses whose activities cause environmental damage.

Pension fund trustees must state whether or not they have an ethical stance in their Statement of Investment Principles, so ask to see it.

However, Tom McPhail of IFA Hargreaves Lansdown warns that only a minority of occupational plans apply an SRI policy. "In final-salary and large money-purchase schemes, trustees make the decisions - which means you may not get any say in the matter."

Yet employee power can make a difference if enough people demand change.

"If [there is no SRI policy]," says Mr McPhail, "then write to your employer to lobby for the right to be given this [investment] option."