These managed funds offer varying definitions of what constitutes an ethical investment. Contrary to what some people may think, investing in an ethical fund does not mean that you are donating money to good causes - it simply means that your money is not invested in companies that are considered 'unethical'.

The two most common investment strategies adopted by fund managers involve negative or positive screening. Negative screening means a fund strictly excludes companies involved in practices deemed to be unethical, such as the manufacture and sale of armaments and tobacco.

In contrast, a positive screening policy will accept companies that embrace ethical practices which investors wish to support, such as reducing pollution or embracing good employment practices and as such, a large company or a FTSE constituent would not be automatically excluded from consideration simply because it was, for example, a bank.

The third preference is to use engagement strategies where fund managers encourage companies to make improvements to their ethical, social and environmental policies.

The use of negative and positive screening has created a variety of ethical funds, some of which are 'greener' than others. AEGON's ethical funds (Ethical and Ethical Cautious), for example, are respected for the stringency of their screening processes. The investment criteria is highly selective, preventing investment in any company whose activities could be considered harmful to society or the environment.

Investors need to be aware of the screening criteria used by a fund manager. It may not suit all investors' preferences to choose an ethical fund that encourages positive ethical practices rather than using a straightforward negative screening process. People often think that the ethical policy applied by a fund manager will also have a large impact on the financial performance of the fund. However, research by EIRIS (Ethical Investment Research and Industry Service) indicates that investing according to ethical criteria makes little difference to overall financial performance.