Ethical Investing Likely To Catch On Here

While many providers are simply saying that they don't have any ethical funds, a growing number are either offering them or are considering doing so.

With KiwiSaver attracting a new type of person into managed funds - perhaps a less business-oriented and more socially oriented person - many people will at least consider ethical funds.

There are several approaches to ethical investing - sometimes called socially responsible investing, or SRI:

· Negative screening. Managers avoid investing in companies in particular
industries, which might include tobacco, alcohol, armaments, uranium mining, pornography and gambling. They might also exclude companies involved in certain activities, such as animal testing or environmental degradation, or companies that pay 'excessive' salaries to the bosses.

· Positive screening. Managers invest only in companies that have what the
manager judges to be good records in environmental issues, climate change, human rights, employee conditions, philanthropy and so on. They may also seek out companies with "good" accounting, marketing or corporate governance policies.

Sometimes managers use a combination, firstly using negative screening and then selecting from the remaining companies on the basis of positive screening.

· Engagement. Managers commit to talking with the companies in which they
have invested and encouraging them to use ethical practices.

· Best of class. Managers buy what is judged the best company in each
sector. The fund might include a tobacco or alcohol company, but it would be the best tobacco or alcohol company.

· A specific cause. Ethical investing is said to have started with funds
that avoided investing in South African companies in the apartheid era, or in companies that provided supplies for the Vietnam War. These days you might find a fund that, for example, invests only in companies that have a good record on global warming issues.

Ethical funds invest in a variety of types of assets. While some hold only shares, others include bonds and other financial instruments. Before you decide to invest in an ethical fund, I suggest you work out how much risk you want to take.

If you prefer a higher-risk fund - which typically holds all or mostly shares and perhaps some property - go for an ethical share and/or property fund. But if you prefer a balanced fund - which typically also holds bonds and perhaps cash - look for an ethical fund with an appropriate mix. You don't want to end up in an all-share fund that is too risky for you just because it is ethical.

Consider, too, the geographical mix. If you prefer a fund that holds investments from around the world - to take advantage of the risk reduction that comes from diversification - look for an ethical fund with overseas assets.

From a financial perspective, are ethical funds a good investment? Some research says yes; some no. My conclusion is that, as long as an ethical or SRI fund is widely diversified, it will probably perform about as well over the long term as other widely diversified funds.

Note, though, that researching and monitoring companies increases the costs of running a fund and is likely to therefore increase fees. So performance after fees may tend to be a bit lower.

Still, those who invest in the fund might well be happy to settle for a bit less money and a clearer conscience.