So you think you're ethical?

IT IS laudable to feel distaste at French nuclear testing in the Pacific, to eschew French goods as a protest, or at least to feel a frisson of guilt while tucking into your favourite French cheese. But many people have not made the connection that through their investments, they may be supporting companies that assist in destroying some beautiful parts of the world.

At risk is anyone who invests in a fund that buys shares in European companies but where there are no controls on how that money is spent. Even investors in British companies may be funding suppliers of parts for deadly weapons.

The issue highlights the value of ethical funds which monitor their investments. Each fund has a distinct mission statement. This might include not investing in companies that experiment on animals or are involved with arms manufacture. The funds will also seek to back companies that aid the environment by, say, recycling waste.

Most of these funds employ outside research to assist them with their choice of company. They will also have a committee of reference to conduct further vetting.

The counter-argument to all this is that there is no such thing as ethical investment - that it makes no difference because even the cleanest-looking company may ultimately have some links to an "undesirable" business.

This is the reasoning that gives excuses to those who feel more comfortable ignoring these issues. It is condoning the attitude that some attempt and no attempt are equivalent. In reality, the better the support for ethical investment, the better educated investors are to the alternatives.

Does it make a difference? Consider this. A client of mine had inherited an investment portfolio including shares in Tomkins. This company has an odd combination of activities. It owns Hovis, the company of the cuddly adverts played to Dvorak's "New World" symphony. However, its unsavoury activity is supplying leg-irons for chain-gangs in the US. My client had no doubts about selling the stock.

My company got involved in recommending ethical funds eight years ago as a result of client interest. A guide* we produce, now in its sixth edition, rates the funds for their effectiveness in the screening process. Some score significantly better than others. The NPI Global Care Fund, for instance, enters into correspondence with the companies in which it has chosen either to invest or disinvest. In this way it is performing an educational role: the companies will know that unacceptable behaviour means no money.

So what might a positively ethical investment look like? For example, First Bus (previously Badgerline) works to improve public transport. There is encouragement to reduce air pollution from private cars by providing workable alternatives. First Bus is also experimenting with the use of natural gas to cut toxic emissions. FW Thorpe, meanwhile, has pioneered low-energy lighting. Again the motive is energy conservation.

There are dilemmas. Does one invest, for instance, in banks? They are not traditionally considered ethical because of their Third World debt, and because they seem willing to lend to companies irrespective of their activities. But many banks have good staff policies, in particular for women returning to work.

Such dilemmas demonstrate that stock-picking will depend on the views of the individual investor. Ethics are as personal as thumbprints; no two sets are the same and we just have to find the best fit.

And does it make a difference in the wider world? Yes, because lack of investment hits a company where it hurts most, the pocket. British Gas shareholders may not have made a direct difference - Cedric Brown still got his pay rise - but their indirect impact was enormous, subjecting top pay to a kind of scrutiny it had not suffered before.

Finally, does ethical investment make money for the investor? Statistics show that the average ethical fund over the past five years has outperformed the average fund that was not screened. So it is possible to profit with principles. Indeed, it might well be unethical for us to recommend funds that could harm our clients financially.

q Amanda Davidson is a partner at independent financial adviser Holden Meehan.

*'An Independent Guide to Ethical and Green Investment Funds' can be obtained free by phoning 0171-404 6442.