The ethical trusts that like to dabble on the dark side

Some 'green' funds could use your cash to back polluters or animal testers, says Madeline Thomas. So how flexible are your values?

We're used to shades of grey in an argument but now we've got shades of green.

Ethical investing is big business: in the first quarter of 2007, people put almost £100m into ethical funds, taking their total assets under management to over £5bn, according to the Investment Management Association. However, investors in some of these funds are still likely to end up backing polluters, animal testers, or banks that lend to companies whose activities don't seem ethical.

Time and again, the same companies crop up in the top 10 holdings of leading ethical funds. Among the most common are the big banks and energy groups.

The Scottish Widows ethical fund, for example, has these holdings as well as firms that conduct animal tests for medical research. Others, such as F&C's Stewardship Income fund, shy away from the big banks as they cannot see who they are lending to. F&C does not invest in companies that test on animals, either, although that position looks set to change.

Justine Fearns of independent financial adviser (IFA) AWD Chase de Vere says most ethical investors want either "dark green" funds, which exclude companies that don't meet strict criteria, or "mid green" funds, which engage with the companies they invest in to work for change.

Most controversial are the so-called "light green" funds. Many of these employ the Ethical Investment Research Service (Eiris) to screen otherwise non-green sectors and select the "best of class" – those firms considered the most effective at tackling issues such as sustainability, pollution and human rights.

On this basis, for example, the Skandia IM Ethical fund can include oil and gas producer Statoil; the L&G Ethical Trust can hold mining company BHP Billiton; and Axa's ethical fund can hold alcohol group Diageo.

Specialist ethical adviser Steve McKenna of IFA McKenna Financial says that level of pragmatism often suits older clients who want to make a difference but still seek balance. "They are not going to prostitute their principles for an extra buck but they do want their fund to be profitable."

Mike Fox is fund manager for the CIS Sustainable Leaders Trust. One of his favourite holdings is Scottish and Southern Energy, which has coal-fired power stations. "It's a big polluter," he says, "but it's doing lots to reduce its carbon footprint and is investing a huge amount in renewables. We will invest in polluters if they are leading their sectors on environmental issues."

The Sustainable Leaders fund prioritises companies involved in improving the environment and enhancing human health and safety. But its remit allows it to include businesses that merely "promote awareness of these issues among the general public".

The fund tends to avoid animal testing for anything other than medical-research purposes; items with military applications; countries where human rights are disregarded; companies involved in the manufacture of tobacco and related products; and the generation of nuclear power.

However, it may invest in companies involved in any of these activities as long as they account for less than 10 per cent of that business's total turnover.