Just who do ethical funds think they're kidding?

When I get a news announcement from that rather pointless industry body the Investment Management Association in my email in- box, I typically go for the delete button like a striking cobra. But summer ennui got the better of me last week, and I found myself reading with disappointment that the "ethical" fund sector of the asset management industry continues to flower like the hardy, poisonous weed it is.

Funds under management in the second quarter of this year reached [pound]5.6bn, according to the IMA, an increase of 32 per cent on the same quarter in 2006. There was a net inflow (that's the difference between people buying and cashing in) over the quarter of [pound]138m.

"Net retail sales of ethical funds have seen large increases every quarter for the last year, with sales in this quarter alone surpassing those for each of the last four years," said Sheila Nicoll, IMA deputy chief executive.

So what is it, you ask, that has me reacting like some morally desiccated retired colonel from the Home Counties? First, the unabashed and largely unchallenged marketing chutzpah. I have been watching the machinations of Pious Aspiration Fund Management for over two decades, and while the pioneers (Friends Provident springs to mind) had proper intentions and a good track record, it became very fashionable to have a conscience after the crash of October 1987 (just wait for all the 20-year retrospective articles later this year - yawn). Until that point, greed really had been good.

The underlying motive of asset managers and investors alike was, remains and always will be capital gain. Of course, it's useful if investors can convince themselves they are doing good, but there is nothing quite as remorseless as money chasing after itself. Various screening committees and guardians of other people's morals agonise over where to invest, but what inevitably happens is that the urge to do well in the rankings means that fund managers take liberties with the concept of what they deem to be acceptable. For example, Rolls-Royce may not be considered suitable for an "ethical" portfolio by some as it is part of the defence industry; but what about the innocent materials company that happens to have an MoD contract and may make bottles or clothing used by the military? Some funds will invest, some won't.

The ethical investment movement has helped bring about some better corporate social responsibility, which I do welcome. Companies could and should care for the health and wellbeing of their employees. It is enlightened, and makes financial and business sense too. But pretending that capital gain can be purely acquired is pure sophistry.

Which is really the second point of all this: the moral relativism. The Germans, who have a pretty finely attuned attitude to ethics, do not embrace ethical funds. The logic, as I was once told by a board member of DWS, the asset-management arm of Deutsche Bank, is that if one of a stable of funds is "ethical", this implies the others are not.

The only sensible way to do ethical investing, I suggest, is for investors to take their returns in "green points" - the kind of Californian-style audit that looks for environmental or workplace outcome and grades it accordingly. Investment then becomes a kind of loan. If you throw in financial returns, managers will compete, investors will look for the best returns, and the corporates will fall over themselves to dress up as ethical or sustainable.

This industry is a heavyweight boxer in a skirt (it has to be heavyweight at [pound]5.6bn). And there's nothing wrong with that, but why pretend to be a lady?

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