Moral Money: In the 19th Century, American Religious Groups Boycotted Companies That Supported Slavery or Were Involved with Alcohol. Their Action Prompted an Ethical Finance Movement Which Has since Crossed to the UK and Is Now Gathering Pace across Mainland Europe. Geographical Charts the Rapid Rise of Socially Responsible Investment. (Ethical Finance)

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The UK is the world's second largest arms exporter, with about a 17 per cent share of the total market compared with nearly 50 per cent for the USA. British companies such as BAE Systems rank among the top suppliers of military technology and equipment to developing nations around the world. Most major UK fund managers include BAE Systems in the stock-market portfolio of their ISAs or PEPs.

A lot of people are unhappy about having their money funnelled into companies that sell these systems to developing countries. Many are also uncomfortable with the idea of their bank making loans to repressive regimes. A whole raft of financial institutions, now numbering more than 60 investment funds and several banks, claim to offer some kind of alternative.

Ethical finance is a comparatively new business in Britain. Investing with a social conscience traces its roots back to 19th-century America, where such religious groups as the Quakers and Methodists refused to put their savings into businesses they found to be offensive to their ethical principles. The alcohol industry and slavery ranked at the top of that list. But ethical investment did not enter the wider public eye in the USA until a century later, with the outbreak of the anti-Vietnam war movement of the late 1960s. That was when tens of thousands of university students, from Columbia in New York to Berkeley in California, protested against what they denounced as unethical investment practices by big business.

Out of these protests was born Pax World Fund, which in 1971 became the first modern ethical fund to exclude from its portfolio any company with links to the arms industry. The ethical finance movement crossed the Atlantic a little over a decade later and first took root in Britain in 1984 when fund manager Friends Provident, which traces its origins back to the Quakers, set up its Stewardship Fund. Just as in the USA, public awareness was motivated by an international political cause, in this case the gathering protest movement against apartheid. The fund took on a commitment to avoid investing in companies with links to the South African government, and has since focused its exclusion remit on banks, oil companies and pharmaceutical firms.

Friends Provident was able to take advantage of a huge pool of latent demand, and in its relatively short lifetime the fund has attracted 1.3billion [pounds sterling] in investors' funds--roughly a third of the total ethical funds market. "We were able to capitalise on this demand and got a head start on the others," says Ted Scott, one of two fund managers looking after the Stewardship Fund. But as Scott points out, 20 years ago ethical investment was regarded with deep scepticism. "The fund was viewed as quirky and everyone in the market was convinced it was bound to underperform," he says. But the sceptics were proved wrong. In the past ten years the Stewardship Fund has produced an annualised return of 9.6 per cent, just nudging ahead of the general stock market which has been around for three centuries.

The advent of ethical finance in the UK proved to be the tip of an iceberg; the mass that was lurking under the surface must have left even the most optimistic marketeers of green financial and consumer goods products gaping in astonishment. The most recent figures for ethical purchases (excluding financial products) show an 18.2 per cent rate of growth for a selected basket of consumer goods between 1999 and 2000, compared with only 2.8 per cent for the overall market. Last year, the New Economics Foundation (NEF), which calls itself a "radical think-tank" and the Cooperative Bank brought out the UK's first Ethical Purchasing Index (EPI). The report shows that the value of ethical consumer purchases in this period rose from 4. …