Should ethical investment funds be putting millions of pounds of people’s money into oil, gas and coal companies?

A new report says too many UK ethical funds are still invested in fossil fuels and heavily polluting industries, at a time when growing numbers of people are looking to reduce their exposure to these sectors.

Launched to coincide with Good Money Week (the new name for National Ethical Investment Week), which kicks off on Sunday 19 October, the report from ethical independent financial adviser firm Barchester Green names the “sinners” and “winners” of the multibillion-pound ethical and environmental funds industry.

Top of the sinner fund list is Aberdeen Responsible UK Equity Fund, which has four oil, gas or coal companies in its top 10 holdings: Royal Dutch Shell, Centrica, BG Group and mining giant BHP Billiton. Between them, these four companies make up around 16% of the £25m fund’s equity holdings.

Another sinner fund, according to the report, is Scottish Widows Ethical, which has millions of pounds invested in oil and gas company BG Group. In fact, the Reading-based company is its biggest holding, making up around 4.2% of the £96m fund.

Barchester Green says the five winners are all funds that have a transparent, positive investment strategy, avoid exposure to fossil fuels and actively seek out opportunities for long-term growth in companies tackling major social and environmental issues. They are:

• FP WHEB Sustainability Fund A £65m fund launched in 2009. John Ditchfield at Barchester Green says: “Rather than seeking to screen out or avoid negative industries, they are positively investing in sectors which offer strong prospects for financial returns and social and environmental benefits.”

• Alliance Trust Sustainable Future UK Growth Fund Ditchfield says it has “a consistent record of high performance”, and is the top UK fund over five years in the ethical and sustainable sector.Launched in 2001, it is valued at £194m.

• Quilter Cheviot Climate Assets Fund A £29m fund that invests predominantly in shares and focuses on sustainability, with five key themes: energy, food, health, resources and water.

• Premier ConBrio B.E.S.T Income A £12.6m fund launched in 2006. The “B.E.S.T” stands for Business and financial, Environmental/ecological, Social/governance and Transparency – the four criteria applied to potential investments.

• Jupiter Ecology Fund One of the best-known ethical funds, launched in 1988 and now valued at £446m. It focuses on companies providing solutions to environmental and social problems. The top 10 holdings include sausage-maker Cranswick and catalytic convertor firm Johnson Matthey.

Ditchfield says: “Our review found that ethical funds need to move beyond ‘negative screening’ to avoid a limited number of ‘sin stocks’ like tobacco and arms, to review their position on fossil fuels. Today’s ethical investors expect their money to be invested in companies making a positive impact, and would be concerned to find they are funding companies extracting oil and coal, whose activities are linked to global warming.”

Responding to the sinner fund claims, Aberdeen Asset Management – which also looks after the Scottish Widows ethical fund – says: “The funds adopt an engagement approach with a negative screen overlay. The team engage with portfolio holdings on environmental, social and governance issues with the aim of encouraging demonstrable efforts and improvements...

“The team use a negative screen to screen out companies involved in the production and/or sale of tobacco or pornographic products, gambling and weapons.”

Good Money Week runs until 25 October

Chance to buy?

Stock markets have been taking a pummelling, and ethical funds haven’t been immune. Major green funds such as Jupiter Ecology and Kames Ethical Equity are down by 9.2% and 6.9% respectively over the past month alone – although over five years they are up 29.7% and 64%.

Some may take the view that with share prices tumbling, this isn’t a bad time to invest. There are dozens of ethical funds to choose from, with most available as Isas. Go to the Ethical Investment Association website to find a specialist adviser in your area – or you could do it yourself.

Traditional ethical funds typically use a combination of negative screens (to eliminate arms manufacturers etc) and positive screens (to favour businesses with a good record on corporate social responsibility or that are involved in low-carbon industries etc).

In addition to letting people put in lump sums, many funds offer regular savings schemes where the minimum monthly investment is typically £50, which may suit parents or grandparents who are investing on behalf of a child.

Be aware that many ethical funds favour the same companies, and some may be narrowly invested and suffer higher levels of volatility.

The website Trustnet allows people to look at how the different funds have been performing over various time periods.