" Gain all we can without hurting our neighbour." That's how Methodist founder John Wesley summed up his vision of ethical investment in a sermon entitled The Use of Money. Wesley's basic idea – that we all have a responsibility to ensure that our spending, saving and investments don't cause harm to others – seems even more pertinent today than it did when he delivered his groundbreaking sermon more than two centuries ago. Today, the money in our banks, investment funds and pensions gets lent to all kinds of companies with questionable ethical credentials. Even public-sector pension funds routinely buy shares in arms firms, while banks stand accused of financing ecologically harmful activities ranging from deforestation to tar-sands extraction.
Thankfully, there's plenty that concerned consumers can do about all this. Indeed, ethical financial services have come a long way since John Wesley's time, with a growing number of banks and investment funds offering green and socially responsible options.
Banks
For day-to-day banking, the most popular ethical current accounts are those offered by the Co-operative Bank and its online arm Smile.co.uk. These are the only mainstream banks that place green and ethical policies at the core of their business – a reflection, perhaps, of the cooperative movement's socially minded origins. Every few years, the Co-operative Bank consults with its customers about their social and environmental priorities and updates its comprehensive ethical investment policy accordingly.
If you're looking for a savings account, it's also worth considering the Triodos Bank (triodos.co.uk), which goes further than the Co-op by publishing a full list of every company it invests in. Triodos practices cause-based investment, which means that it actively seeks to invest in companies offering social or environmental worth, rather than simply avoiding firms it doesn't approve of. Other options for savings accounts include CharityBank.org, which only lends to charities, and the Ecology Building Society, a mutual that specialises in financing the building or renovation of eco-friendly homes.
Investments
When it comes to investments, the options are more numerous still. There are nearly a hundred UK retail investment funds practising socially responsible investment (SRI). These range from dark-green funds with very strict rules about which companies to invest in through to light-green funds with slightly more flexible policies.
The classic dark-green investing approach is to shun all companies in certain sectors, such as arms, tobacco and fossil fuels. By contrast, a light-green fund might invest right across the stockmarket but only in those companies working to improve their ethical performance. Light-green fund managers may also engage with company management on ethical issues, lobbying to be more ethical either behind the scenes or as a shareholder at the annual general meeting.
As well as broad SRI funds, there are also more specific types of ethical investment vehicles, ranging from climate change funds focusing on clean-energy technology, through to sharia funds that make investments compatible with the Islamic faith by not investing in companies whose primary activity involves alcohol, tobacco, pork-related products, weapons and defence, entertainment or conventional financial services. Almost all types of green funds are available within ISA wrappers for tax-free savings.
There's also a baffling range of options available to anyone choosing a stakeholder or personal pension scheme. If you have a pension via your work, however, you may be limited to lobbying the trustees of the scheme to draw up an ethical investment policy, if they haven't done so already.
Fund performance
Green and social considerations aside, do ethical investments offer competitive returns? Usually, yes, though they have been struggling a little recently. Because ethical funds typically exclude recession-proof stocks such as tobacco, and because they often invest in small companies prone to credit squeezes, they've taken a 30% hit since mid-2008, compared to a 25% hit for conventional funds, according to one recent study. Over the longer term, however, the research suggest that the balance of risks and returns for an ethical and a non-ethical fund is "not materially different". In other words, following John Wesley's advice and thinking about the broad impact of your savings and investments needn't make you any poorer.
Duncan Clark is the author of The Rough Guide to Green Living (rrp £9.99), which will help you understand the issues and move towards a sustainable, lower-carbon lifestyle
