Ethical Investments


The first ethical investment fund was launched in 1984 by Friends Provident, driven primarily by the fact that they began as an organisation serving the Quaker community. Since then, the ethical investment market has continued to grow.

Generally speaking, these funds fall into two categories – social responsibility or environmental, with some funds aiming to satisfy both social responsibility and environmental mandates.


Most funds are administered by first applying a negative screening program. This excludes potential investments that do not meet the ethical criteria for the fund. Some funds apply only positive screening, which identifies suitable investments on the grounds that the underlying company contributes positively towards the ethical criteria.

To demonstrate the difference between negative and positive screening we could look at shares in the oil company BP. If a fund operates negative screening against companies which damage the environment, BP is likely to be excluded as a potential investment. On the other hand, if a fund operates positive screening it may accept BP on the grounds that it funds significant research into cleaner energy sources. This is an extreme example, as it is unlikely that BP would be held in an environmental fund, but it helps to illustrate the two screening policies.

Ethical Screening

Ethical Screening is an external organisation that provides information on retail collective funds available in the UK which have an ethical, environmental or responsible investment approach. In addition to our own analysis, we utilise Ethical Screening in our research.

Our Ethical Investment Range

Mearns & Company operates a panel of funds in which we have absolute conviction. Part of our own screening process for any fund is to ensure that the manager operates responsibly and ethically in their day to day activities. However, the majority of funds are not subject to strict ethical mandates.

Although there are more than 80 funds which have ethical mandates, we believe that only a small number of these funds are suitable for our clients based on the following criteria:

  • Risk Management
  • Investment Process
  • Fund Manager Tenure
  • Past Performance

Of these, we feel that risk management is critical since many of the traditional defensive holdings in a portfolio, such as shares in tobacco and armaments companies, are not available to the ethical fund manager. For this reason, ethical funds typically display higher volatility and fall in value more quickly when stock markets are in decline.

Using our screening process and asset allocation models, we feel that we have selected a range of funds which can moderate risk and meet our clients’ ethical investment criteria.

Ethical Categories

We have established broad categories that we use when matching investments to our clients’ ethical requirements. These are:

  • Alcohol
  • Animal Testing
  • Climate Change
  • Environment
  • Equal Opportunities
  • Gambling
  • Genetic Engineering
  • Human Rights
  • Intensive Farming
  • Military/Armaments
  • Nuclear Power
  • Pornography
  • Positive Business Focus
  • Tobacco

For a more detailed explanation of each category, please refer to the categories below


Although alcohol can be consumed without harm, it is also a toxic and addictive substance which causes illness, accidents, violence and family suffering. As evidence of the health risks associated with alcohol consumption becomes more widespread, manufacturers have sought new customers and launched new products. The drinks industry has been criticised by campaigning groups such as Alcohol Concern for targeting young or under-age drinkers.

In response to investor demand, some funds will not invest in companies involved in the production, marketing or sale of alcohol, while others may partially screen out such companies e.g. they may avoid companies which derive more than 10-20% of their income from such activities.

Animal Testing (Cosmetics)

Cosmetics testing is often seen as having the least justification in terms of benefit to human beings. The European Union has agreed to ban most cosmetic tests from 2009, with a ban on import into the EU of cosmetics with ingredients tested on animals – so the problem is not simply exported outside the EU.

Cosmetic tests represent a very small proportion of the procedures carried out on animals, however. The animal testing of all new chemicals (not just those used in cosmetics) accounts for many more procedures – these tests include pesticides, food additives and preservatives.

Animal Testing (Pharmaceuticals/Medical)

The largest proportion of testing is carried out for biological research and drug research. Before new drugs can be tested on humans they have by law to be tested on two species to test the ‘whole body’ effect.

You have the choice of selecting funds that screen out either ‘Animal Testing – Cosmetics’ or ‘Animal Testing – Pharmaceutical/Medical’ or both. Most funds that screen out animal testing do so with regard to testing for the cosmetic/toiletries industry only.

Climate Change

Climate change is now widely recognised as one of the most significant challenges facing the global economy. Environmental impacts include increased flood risk, declining crop yields, species extinctions and extreme weather patterns. The 2007 Stern Review concluded that under a Business-As-Usual (BAU) scenario a 2-3°C rise in temperature could reduce global economic output (as measure by GDP) by 3% annually.

The international science community has now accepted that one cause of climate change is likely to be the increase in greenhouse gas emissions, particularly carbon dioxide, which has occurred since the industrial revolution.

Efforts are being made to improve energy efficiency and develop cost-efficient renewable energy sources such as wind and solar power, which produce no carbon dioxide.

Funds can apply both positive and negative climate change screens. On the positive side they can seek to invest in companies involved in carbon offsetting and renewable or alternative energies, for example.


Funds may seek to positively invest in companies with proven green credentials or operating in green industries such as recycling (waste management) or renewable energy. They may also seek to screen out businesses operating in carbon heavy industries such as fossil fuel industries or those with poor records on other air or water pollution.

Developing an environmental policy statement or making a formal commitment to a set of principles is commonly the first step for companies wishing to address their environmental impact at an operational level. Whether or not a company has a robust environmental management system (EMS) in place may also help determine the choices of potential green or ethical investors.

Equal Opportunities

Despite the many strides made globally in combating discrimination and promoting diversity during the last century, much remains to be done to achieve true equality in the workplace. Key Equal Opportunities issues are discrimination on the grounds of race (ethnicity), gender, disability, age and sexual orientation.

Progress towards equality is at different stages of development in different countries as social practices, legislation, and public opinion all differ around the world.


This has long been a cause for concern amongst ethical investors. With the deregulation of the UK gambling industry there have been claims that addiction to gambling is on the increase.

Interest in gambling has been highlighted by recent concerns over the increased accessibility of gambling through the Internet and interactive TV, and the discussion over the development of super-casinos.

Many funds screen out companies that are involved in the gambling industry altogether although some may allow companies which derive part (usually up to 20%) of their income from gambling sources.

Genetic Engineering

Genetic engineering is generally perceived to be a radically new way of manipulating nature.

Many funds screen out companies involved in genetic engineering – often with specific reference to the manufacturing of GM food products, cloning human embryos or stem cell research.

Human Rights

The debate about globalisation has pushed Human Rights to the top of many ethical investors’ agendas in recent years. Campaigns focusing on corporate behaviour, notably in 1980s South Africa and more recently in Burma, have highlighted certain countries where human rights are seen as most at risk and the implications of continuing to trade with such countries.

While governments have primary responsibility to promote and protect human rights, corporations also have responsibilities. Companies have direct responsibility for their own operations, for example ensuring that their labour rights policies are implemented globally. Companies are increasingly being assessed on their wider impact on fundamental human rights in their operations in countries where oppressive regimes, weak governance and conflict hold sway.

Investors have traditionally boycotted certain countries, but increasingly it is argued that countries need investment to improve basic social and economic rights. It is what the company does in a country that is of interest.

Intensive Farming

Animal welfare organisations have long been campaigning over the treatment of animals used in food production – for example, the conditions in which they are kept, how they are transported and the methods of slaughter. There is also widespread concern about the quality of food produced, particularly about food contamination (in the wake of BSE), antibiotic residues and the use of growth hormones and pesticides. Wider environmental concerns such as the high, concentrated CO2 emissions resulting from intensive farming are also highly relevant for the food production sector.


Many people share the fundamental conviction that, because the taking of human life is wrong, warfare is wrong too. Some take this to mean that the use of military force is unacceptable either for defensive or, more commonly, for offensive purposes.

Others disapprove of what they regard as the harmful diversion of government funds from social spending to unproductive and destructive military programmes, both in the developed and the developing worlds.

The proliferation of weapons in poor countries and areas of political instability or conflict is another area of concern. In recent years there has been considerable public outcry over landmines and over arms exports to oppressive regimes.

Nuclear Power

Since being hailed in the 1950s as cutting edge technology which would be the answer to the world’s growing energy demands, nuclear power has become one of the most contentious of industries, due to radioactive pollution and waste problems, accidents, and the industry’s link to nuclear weapons.

Each stage of the nuclear fuel cycle, from uranium mining to the transport and disposal of radioactive waste, is seen by critics of the industry as increasing the risks of hazardous pollution.

In the 21st century, the industry’s wish to replace ageing plants together with ongoing initiatives to reduce carbon emissions has encouraged a new generation of proposals to be debated internationally.

Many green and ethical funds respond to the nuclear power issue by screening out companies involved with it entirely or partially (i.e. investing in companies that derive only a small proportion of their income from nuclear power).


Objections to pornography have traditionally centred on its tendency to ‘deprave and corrupt’. Current opponents of pornography argue that it is degrading to both men and women, transmitting the message that women are sex objects available solely for male gratification without any form of emotional attachment.

Recent research has provided evidence suggesting that it is likely that pornography can be one of the factors that contribute to sexual violence and sex discrimination. There has been rising public concern recently about Internet pornography, especially child pornography, and also worries about children using the Internet and accessing offensive material.

Many funds screen out companies that are involved in the pornography industry altogether, although some may allow companies which derive part (usually up to 20%) of their income from it.

Positive Business Focus

Many investors are interested to know whether the product or service provided by a company contributes positively to society and the environment.

This could be because its products and services meet an important need, improve quality of life, make the world a safer place or provide a solution to a social or environmental problem. These can include:

  • Environmental technology, including products such as machinery for recycling, wind power generators, and pollution abatement technology
  • Waste disposal companies
  • Public transport and bicycles, including provision of bus services and maintenance of railway tracks
  • Safety and protection, for example alarm systems for elderly people living alone, fire alarms, life jackets and protective clothing
  • Healthcare, including medicines, hearing aids and spectacles
  • Housing, food and clothing


Tobacco is the largest cause of preventable death in the UK, claiming over 100,000 lives every year. It is responsible for at least 90% of deaths from lung cancer, chronic bronchitis and emphysema, and it is a factor in over 20% of all deaths from heart disease. A decline in adult smoking and fears about the effects of ‘passive’ smoking in particular, have encouraged smoking to be banned in many public areas such as pubs, restaurants, offices and on public transport.

The tobacco market is still a significant size and there remains potential for growth.

Important Considerations

It is important to appreciate that placing ethical restraints on your investments may have some implications:

  • It may not be possible to access a particular asset class
  • A fund matching your ethical beliefs may not be suitable for your attitude to investment risk
  • Ethical funds may under perform their non-ethical counterparts, particularly when stock markets fall. This means that the chance of capital loss is greater
  • Ethical funds may be more volatile than their non-ethical counterparts

Ethical Investment Questionnaire

If you are prepared to accept the above implications and would like us to apply an ethical mandate to your investments, please contact us to complete the Ethical Investment Questionnaire