Open Ended Investment Companies (OEICs).
An OEIC is a company whose business is managing a fund, and like a unit trust an OEIC is open-ended. Many investment funds in the USA and Europe have a similar legal structure.

Investment trusts
An investment trust is a company listed on the London Stock Exchange whose business is to invest in other companies. They are 'close-ended funds' because there are a set number of shares and this number does not change regardless of the number of investors. The share price will fluctuate according to supply and demand for the shares.

Funds of Funds
In addition to these three types of collective investments a small number of ethical funds are ‘funds of funds’. The manager of this type of fund does not put investors’ money directly into the stock market, instead they invest it in other managers’ funds. They offer similar conditions to the other three collective investments and are generally suitable for lump sum investments. Like all investments clarify the charging systems as there may be two sets of fees involved here. Also, to ensure the 'fund of funds' is following the ethical criteria you require you would need to check the underlying policy of each of the funds 'contained' in that fund

Investment strategy
Ethical funds invest according to a very wide range of social, environmental and other ethical criteria. There are several different ways that an ethical strategy can be applied to investments, the three main ones that are generally talked about are screening, preference (or best in class) and engagement. These strategies can be used in combination as well as on their own.

Screening is probably the best known amongst consumers - this is where companies may be excluded because of their involvement in certain activities such as nuclear power, the fur trade, tobacco and so forth. This approach also applies where companies may be included for positive contributions to society and the environment such as energy efficient technology, organic farming for example. Many of the long-standing ethical funds have some form of screening.

A preference or best-in-class approach would apply social, environmental and ethical guidelines to give a preferred selection when all other factors are equal such as sector type and financial performance. So for example, a fund manager who has to invest in oil stocks may have a best-in-class approach and select the oil company with the best environmental management.

The third approach - engagement - does not necessarily exclude, include or prefer companies but rather the investor (or representative such as the fund manager) will actively encourage companies to adopt social and environmental best practices.

Research
Some ethical funds have their own internal research teams analysing company activities in order to identify suitable investments for their fund's portfolio. Others use external research providers such as EIRIS to get information on companies, and only undertake the financial analysis of companies. Larger funds will use both.

Communication
Some funds will be very active in this area, communicating the activities, not just financial outcomes, undertaken by the fund on behalf of its investors. Some will go as far as asking investors about their ethical concerns and priorities.

Corporate governance & voting
Always remember that by investing in a pooled fund the fund manager is investing in companies on your behalf. With share ownership comes shareholder influence and voting rights at AGMs. Some ethical funds will have a corporate governance/voting policy that will guide how they use their votes at AGMs and shareholder resolutions.

So when choosing an ethical fund think carefully about which sort of fund you want to invest in. You may have concerns that extend beyond the question of which companies the funds invest in, and what they do. You may be equally concerned about the way funds are run, questions to ask include:

How active is the fund in engaging or communicating with companies? Does it put pressure on companies to improve their policies and practices?

What happens when a company in the portfolio breaches any of the ethical investment criteria of the fund? E.g. Is there immediate divestment or is the company informed to enable it to take remedial action?

How thorough is the research available to the funds on the companies in which it invests? How regularly is the research updated?

Is there an ethical committee or advisory board that is independent of the investment process, to make sure the fund sticks to its published ethical policy?

How does the fund communicate with its investors? Does it have a newsletter or hold investor meetings? What mechanisms exist to allow investors to voice their concerns?

How does the fund use its shareholder influence at company AGMs? Does it have an active voting policy which follows its ethical policy?