Funds to help make you a successful ethical investor

There are around 90 unit trusts, open-ended investment companies, investment trusts and exchange traded funds with some ethical credentials, ranging from the highly specific, such as Pictet's quartet of agriculture, clean energy, timber and water, to the very general such as the Vanguard SRI Global fund, which tracks a global index excluding companies that do not meet SRI criteria.

This means investors need to consider two factors in deciding which fund to buy: whether its ethical criteria are appropriate to their interests, and the skills and record of its manager.

It is not enough simply to buy a fund with an ethical badge: the biggest holding of Vanguard SRI Global, for example, is Exxon and, as Patrick Connolly, a financial planner at Chase de Vere, points out: "Some funds won't hold shares in oil companies because they are harmful to the environment, while others will hold those oil companies they consider 'best of breed' and think will cause less damage or look for greener solutions. Many ethical investors may have been surprised to see their fund holding BP at the time of the Gulf of Mexico oil spill."

He adds: "Diversification is a major problem for ethical investors, which is why ethical portfolios can be volatile. Ethical portfolios will typically avoid some sectors such as tobacco and have lower weightings in others like oil and gas. This means there is more focus on those sectors where they are able to invest, and their comparative performance is often dictated by how the sectors they hold perform compared with those they don't hold.

"Ethical portfolios will also tend to be skewed toward mid and small-cap companies, as they are less likely to be causing any harm or damage, which, again, can make them more volatile."

Jason Hollands at Bestinvest says investors have switched their focus from funds that simply screen out the evil, such as tobacco, arms and gambling, towards those which select companies with good environmental, social and governance behaviour. He thinks the composition of these funds means it could be a good time to buy them.

"SRI funds tend to be light on resources companies because of their high environmental impact. Because these companies are a big part of the index, that means they will perform very differently. Our view is that, because China's economy is likely to slow and it has been a leader in the purchase of raw materials, these sectors could underperform." SRI funds, with a low exposure to these sectors, could therefore do well.

Bestinvest has produced a guide, Ethical and Green Investing - Navigating the Maze, setting out the issues investors need to consider.

Bestinvest's recommendations include Kames Ethical Equity and Standard Life UK Ethical in the UK; for global investors it suggests Aberdeen Ethical World and Jupiter Ecology.

Connolly also likes Aberdeen Ethical World and Kames Ethical Equity. For those who want to invest in bonds, both opt for Kames Ethical Corporate Bond and Standard Life Ethical Corporate Bond funds.

The excellent long-term record of Ecclesiastical means its UK, international and European funds should be on SRI investors' lists.

Other ways to invest ethically, away from the stockmarket, include the savings accounts and ISAs from Triodos Bank - which also offers four investment funds, including a microfinance fund providing loans and finance to projects in Asia and Africa.

Ethex is a recently launched exchange for positive investments, or projects designed to do good, such as credit unions and local energy products.