Ethical investing is all a matter of opinion – and I'll put money on that

There is no doubting the popularity of "ethical" investing, and why not? As Eiris, the ethical investment screening service (not for profit, naturally), points out, ethical products – fair trade, etc – have become increasingly popular with good reason. Why, then, should financial products be considered differently?

The catch is that once you get into the process, problems occur. Take the FTSE4Good index, which has been "designed to measure the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies".

Decisions on whether a company gets in are based on Eiris research.

It is rather a shame that the names of those who are in aren't published on FTSE's website, but fortunately the index provided me with a list and there are one or two interesting companies on it. Take, for example, the oil giant Royal Dutch Shell. As I have said before in this column, I was hauled over the coals by a colleague for querying whether oil should be seen as an ethical investment. Her point was that the lights wouldn't be on without it.

Debates can actually be conducted about a wide range of companies in a wide range of sectors. Take Diageo (featured last week). Those who enjoy the odd tipple probably enjoy Diageo's products. It has so many famous drinks brands that they are actually rather hard to avoid. However, a Muslim might feel differently. So, for that matter, would many Christians. But it is still in FTSE4Good.

Those who gamble would probably have no issues with bookies such as Ladbrokes or William Hill (I certainly don't). Religious people might, though.

Some left-wing commentators and politicians (from the sillier parts of that side of the political spectrum) have also been puffing their chests out because bookies have allegedly been opening shops up in poor areas.

Actually, they've been opening all over the place thanks to the abolition of the "demand" test that used to allow existing betting shops to block rivals from opening new ones.

Lack of profitability will see a lot of those new shops closing over the next few years, but let's not let that get in the way of some good old tub thumping. Hills and Ladbrokes are both in.

Meanwhile, a broadcaster such as BSkyB (it's in) might find itself on certain people's blacklists for showing pornography (or material deemed to be pornographic). Oh, and then there's the small matter of one of its director's connection to the phone-hacking scandal.

Much actually depends on one's own personal prejudices. Which is why some "ethical" funds are classified as "light green" – perhaps using similar criteria to FTSE4Good – and some are "dark green": wind farms ok, but no to a wide range of companies including (probably) booze, gambling and of course, fags.

Yet the ever-controversial weed has some attractions as an investment right now. On the face of it the tobacco industry faces problems, particularly in the big Western economies: taxes keep getting higher and restrictions on where people can smoke keep getting tighter. What's more, the recession has hit volumes. Tobacco is addictive. But even those who are reluctant to give it up have cut back.

That said, when your customers are addicts they tend to stick. So when you've got your hooks into them, they're yours.

Then there are the emerging markets where the restrictions on what tobacco companies do tend to be less stringent and whose citizens are benefiting from rising incomes. Guess where some of those are being spent?

This backdrop means that the tobacco companies can offer reasonable growth prospects (Imperial Tobacco should turn in earnings per share growth of 9 per cent, British American Tobacco a bit more). They also produce solid dividends which are well covered by earnings.

Trading on about 12 times 2012 full-year earnings with a prospective yield of 4.2 per cent, Imperial Tobacco has been able to push through price rises to more than offset a fall in volumes. Its most recent update (at the end of last month) has provided confidence that it will meet full-year forecasts.

The shares have come off a bit recently, but tobacco companies tend to be resilient when markets get choppy.

Personally, I'd rather my money wasn't in these two, not so much because I object to tobacco but because pushing it hard in countries where regulation is light makes me a little uncomfortable. FTSE4Good shuns them too.

But if this doesn't bother you, Imperial Tobacco would be a solid hold.

British American Tobacco is nearly three times the size of Imperial. It trades on a heady multiple of nearly 15 times forecast full-year earnings, albeit with a slightly better forecast yield (4.4 per cent). The shares could come off a bit more before they would make sense as an investment. Avoid.