Ethical investment has long been dismissed by many in the international financial community as the preserve of wishy-washy liberals.

Driven by profits and returns, hard-nosed investors have had little time for social and environmental considerations that could prove costly.

But growing concerns about sustainability, environmental damage and climate change mean that what was once of interest only to charities, religious institutions and a handful of scrupulous private investors is starting to reach the mainstream.

Socially responsible investment (SRI) is becoming a buzzword in Britain and interest is growing throughout Europe, particularly in countries with strong environmental records such as Germany and the Netherlands, and as far afield as Australia.

In Britain, the amount invested by private investors in retail ethical funds increased by 27 per cent to £3.3 billion sterling (#5.3 billion) last year when funds invested in unit trusts as a whole grew by 10 per cent, according to the British-based Ethical Investment Research Service.

A number of new funds, from companies such as Norwich Union and Jupiter, have recently been introduced on the British market while regulations introduced last year in Britain made it obligatory for pension fund trustees to state the extent to which they take into account social, environmental or ethical considerations in choosing their investments.

But the proof that SRI was really storming the bastions of capitalism came with the February announcement by FTSE, publisher of the famous FTSE 100, that it planned to establish a series of ethical indices.

FTSE - which is co-owned by the London Stock Exchange and Pearson Plc, publisher of the Financial Times - is working on the new index series called FTSE4good and hopes to introduce the first of the indices this summer.

There will be four separate benchmark indices of companies suitable for SRI - a UK index, a European index, a global index and a US index. FTSE hopes to begin the European and UK indices around the end of June while the global one should follow toward the end of the year.

The aim is to provide a global standard for socially responsible investment.

"There are many, many SRI funds but what's missing is a benchmark," says FTSE's Ms Sandra Steel. "We want to set the standard in SRI."

Companies will have to satisfy certain criteria before being included in the index. Company performance will be assessed in terms of the environment, human rights and social issues, and stakeholder relations before they can be admitted. Firms involved in certain business practices, such as the manufacture of tobacco, will automatically be excluded.

FTSE plans to give the licensing fees from the indices to the United Nations children's fund, Unicef, along with 50p for every terminal carrying any real-time FTSE data. According to Ms Steel, this should amount to around £1 million this year.

The FTSE move should provide a fillip to an industry that has grown since the first specialist ethical fund was set up in Britain in 1984. Drawing up an ethical fund is far from an exact science and the existence of a recognised benchmark should help fund managers and investors in making their choices.

In general terms, most fund managers involved in the area deploy a mixture of negative and positive criteria in the ethical selection process.

To start with, firms involved in certain types of business, such as the production of alcohol or tobacco, or the manufacture of arms or pornography are generally excluded.

However, investment management group Jupiter, which runs three ethical funds, has a general policy of not investing in any firm that derives more than 10 per cent of turnover from a banned activity. This allows it, for instance, to invest in a supermarket that sells alcohol or cigarettes, according to Mr Michael Tyrell of the firm's environmental research unit.

After deploying negative criteria, investment firms then tend to focus on positive attributes, including firms with a good record on environment management, employee welfare or community relations.

Of course, the usual financial disciplines have to be considered as well. "Obviously, we look at whether it's a decent company and whether it's making money," says one fund manager.

Some funds, particularly in the US, take a different approach. Using the Dow Jones sustainability index as a benchmark, they adopt the "best in class" method. As a result, they may not totally exclude sectors such as oil or tobacco, opting instead for the companies with the best records in these areas. Defenders of this approach says it puts pressure on companies to improve their behaviour so that they become attractive investment candidates. Above all, most fund managers agree a certain degree of pragmatism is necessary.

"If you want to be totally environmentally purist, you would rule out every company in the world," says Jupiter's Mr Tyrell.

jmosullivan@irish-times.ie