Ethical investing appears simple enough: not investing in companies that do not meet certain ethical standards. Ethical investors typically do not invest in companies that that supply certain products or services, of that operate in or supply certain countries.
A simple example of an ethical investor's limits would be something like: no investments in tobacco or armaments and no investments in companies with links to certain countries.
At first glance this would appear to be reasonably straightforward. One simply invests in companies outside those sectors, and looks at where a company's turnover originates (which is disclosed in its accounts) and where it has operations (usually disclosed elsewhere in its annual report).
However things are not really that easy. A paper manufacturer may make paper for cigarette manufacture. An electronics company may sell components to arms manufacturers.
Geographical constraints are even harder to check. The geographical breakdown of turnover is usually done at the level of regions rather than countries so it is likely not to be specific enough. Looking at where a company operates is definitely not enough: may companies sell to countries they do not operate in.
There is also the question of how much exposure to something inethical a particular investor is prepared to tolerate: it may not be reasonable to not buy shares in an electronics company purely because 1% of its sales are to arms manufacturers.
For this reason investors sometimes use services such as Eiris that provide research that can be used to filter investments against an investor's ethical criteria.
Investors can also do their own research. In addition to the disclosure of geographical breakdowns and where a company operates, companies often disclose a lot of additional information that can be useful. For example, many companies disclose major contracts and other deals. The commentary on results can also be useful, for example, if a company says that high defence expenditure boosted revenues, you can be fairly certain that military customers are significant.
A clear advantage of investors doing their own research is that they can balance different facts against each other. A particular individual investor may decide to invest in a company that fails one ethical criterion because it has an outstanding performance elsewhere.
Investors doing their own research may find useful information available from many sources. For example environmentalist websites may have information on a company's environmental record. Sites such as Corporate Watch can also be useful.
Another alternative is to invest in ethical investment funds. These have become more common and investors now have a good choice of ethical funds, many of them good performers.
In spite of the range of ethical funds available, investors may not find funds that exactly match their criteria. It may be difficult to find a fund that meets an unusual criterion. Investors may also find many funds too strict; for example in order to avoid investing in tobacco, it may also be necessary to avoid investing in alcohol, arms etc., even if the investor concerned does not object to them.
One obvious disadvantage of ethical investing is that it can (depending on the criteria used) make it more difficult to diversify. This is rarely a serious issue given that there are ethical investments available in most major sectors.
Apart from investing in corporate securities, it is sometimes possible to take ethical criteria into account when considering other investments. For example the Co-operative Bank not only has ethical criteria for lending, but it also regularly carries out surveys to find out what ethical criteria its depositors want applied.