Ethical funds have a wide range of different objectives determining what sort of companies they can put money into and no two funds are the same.

In this growing area investors wishing to invest their money ethically are not short of options. Around 50 retail funds that would fall into the ethical catch-all definition are available from a range of companies including Abbey, Henderson and Standard Life.

Ethical funds are sometimes defined on a scale from 'light green' to 'dark green'. Light green funds are those using some ethical principles and applying broad-brush criteria to avoid companies making money from tobacco, arms and pornography, for example. Jupiter Ecology is a good example of a darker green fund that applies more stringent criteria.

Positive and negative screening

All ethical funds screen companies to decide whether they should be allowed into the portfolio. There are two types of screening that are commonly used: negative and positive. Negative screening is where you exclude certain things, usually alcohol, tobacco, arms and pornography companies or companies in oppressive regimes.

Positive screening tries to include companies that add something to the community, that have good corporate governance and working practices, for example.

Using a mixture of the two types of screening lets the fund manager consider more arguments.

Another way in which some fund managers incorporate socially responsible principles into their management is by talking to companies.

And ethical funds often take this dialogue and engagement with companies to different levels. Cadbury's, for example, might be asked where it is sourcing its cocoa from to check that it is not an area that underpays or mistreats workers.

Just rewards

One of the most hotly debated points about ethical investment is whether you can reap good rewards by investing in 'good' companies. The answer is pretty much as it would be for any other style of fund: there are good performers and there are bad performers.

There is no specific ethical sector. However, when compared with more conventional funds the good performers in the ethical arena hold their own.

Ethical Investment Research Services (EIRIS) can provide more information.