For investors with wads of cash weighing down their leather wallets and their consciences, a spot of ethical investing could be the answer to sleepless nights. By ploughing money into socially responsible investment (SRI) funds, investors can feel they are doing good with their money - without actually giving any of it away.

This week, Hibernian Investment Managers launched a range of five SRI funds, noting that in the US 13 per cent of all funds are invested in companies with "a high degree of social responsibility".

There are now over 220 so-called ethical investment funds in Europe. In February 2001, FTSE announced it would establish a series of ethical indices known as FTSE4Good. The sector is most advanced in the UK, where trustees of company pension schemes are now required to disclose how much weight they place on social and environmental criteria when selecting funds.

In Ireland, however, ethical investment opportunities have been thin on the ground. Before Hibernian there was just one other dedicated SRI fund, the Friends First Stewardship Fund, introduced way back in 1989. Examples of stocks in the Stewardship Fund include CRH, Vodafone, Tesco, FedEx and Next.

But what do fund managers mean when they talk of companies with high degrees of social responsibility? In the world of SRI funds, this can mean anything from companies that adopt equal-opportunity employment practices to companies careful not to pump oil into nearby nature reserves; non-discriminatory, eco-friendly corporations that play by the rules.

The first thing an SRI fund manager will do is adopt a practice known as negative screening. This means automatically eliminating companies involved in such things as tobacco, military weapons, animal testing and nuclear power. Companies making money from alcohol, pornography and gambling may also be included on the "do not touch" list.

Another approach is to adopt an engagement policy where shareholders will use their voting rights to encourage and improve the ethical performance of companies, without excluding them.

But the trend in SRI fund management is toward positive screening. This means investing in companies in sectors such as healthcare, biotechnology and sustainable energy and companies judged to have made improvements in their environmental and employment track records.

The aim is to differentiate between companies which are "just paying lip service" to ethical practices and those actually putting them in place, according to Mr Dara Fitzgerald, marketing director for Hibernian Investment Managers. Because the process is so research intensive, a specialist team at Hibernian's UK sister company, Morley Fund Management, will select stocks for the fund along a sustainable development theme.

In the UK, some of the better performing SRI funds over recent years have had a sustainable development focus. Jupiter Ecology, flagship fund of investment managers, the Jupiter Group, is one example.

"Negative screens are in place on all of our funds, but we very much feel we can add value by looking at companies that are producing profitable solutions to key environmental problems," says Ms Sarah Durham, senior analyst at the Jupiter Environmental Research Unit in the UK.

While some are less obviously "green" than others, Jupiter Ecology's portfolio includes companies such as the Go-Ahead Group, a public transport company developing alternative fuels and disabled-access methods; Astropower, the world's largest independent manufacturer of solar electric power products; and Boiron, a leading supplier of homeopathic medicines.

"Anyone can run an ethical fund," says Mr Lee Coates, managing director of the Ethical Investors Group, a financial advice company in the UK that places all of its clients' money into ethical funds. It's the fund managers looking at future sustainable energy trends who are the cute ones, he says.

The Earth Summit in Johannesburg will prompt temporary interest from mainstream investment managers, he continues, but "as soon as it's off the news, they'll forget about it". Meanwhile, ethical fund managers will be getting in early, investing in companies producing innovative and profitable technology.

Ethical investment can be a fuzzy area, open to interpretation according to our personal and political beliefs. For example, many investors in SRI funds will view access to contraception as a basic right. But some funds, including the Ark Social Issues Portfolio run by AIB's US subsidiary Allfirst, will avoid companies making money from contraceptives. This particular fund is aimed at churches and not-for-profit, Catholic-run organisations in the US.

But do SRI funds make any money? "There is a body of thought that says because you're trying to invest in a conscientious way, you must be limited in your ability to generate returns," admits Mr Fitzgerald from Hibernian.

The overall thrust of the marketplace is to look for the highest return, regardless of consequence, confirms Mr Paul Hurley, group marketing manager for Friends First, but an increasing number of people want to know that the money they're investing isn't going to cause major harm.

SRI funds will often be heavily weighted toward tech and telecom companies with low waste output. Some of these have been among the worst hit by recent slumps in the market, while no-go arms and tobacco stocks have returned higher-than-average returns.

In the end, it all comes down to what Morley Fund Management refers to as "a new kind of maths" - adding up on a triple bottom line of social, environmental and financial concerns. According to Morley, very often a company that is prepared for the environmental and social issues affecting its business will also be well positioned to boost market share and grow profits.

In the long term, most SRI funds have done well. Jupiter Ecology has generated returns of 26 per cent over the last five years, while the top four funds in the UK have passed the 30 per cent growth rate over the same period.

In Ireland, Friends First's Stewardship Fund, which has €7.43 million funds under management, delivered an average performance of 8.4 per cent over three years to 2001, compared with an average peer group performance of 5.4 per cent for the same period.

Oil and arms stocks will go up if US-Iraqi tensions break out, notes Mr Coates, but the longer-term view is that ethical stocks, first introduced in the UK market in 1984, have managed to hold their own in a time when they really shouldn't have, he says.

"For about 12 out of the 18 years they have been on the market - two-thirds of the time - social responsibility and the environment weren't the priority issues they are now. If ethical stocks were able to hold their own during that time, surely in the future they're a better bet," says Mr Coates.

There is very little difference between the performance of most ethical funds and mainstream funds, he argues. "The issue is choice at the advice stage. Despite the market being 18 years old, the vast majority of people in the UK are not offered the choice to invest in an ethical fund, even though opinion polls suggest that if offered, 70 per cent of people would take it out," he says.

With over $2 trillion in SRI funds in the US and over £4 billion in the UK, it seems the sector has shrugged off its original New Age, tree-hugging reputation.

Hibernian believes SRIs now appeal to institutions and individuals beyond the traditional market of charity-based pension and investment funds, while Mr Coates says clients of the Ethical Investors Group range from students looking for an ethical bank to multi-millionaires who want to invest their money in off-shore accounts, "but want to do it ethically, if that's not a bit of a contradiction in terms".

Prompted by client interest, most of the larger banks and insurers in the UK have introduced an SRI fund. "Most companies don't care one way or the other, but the fastest growing market has been ethical funds, so whether you believe in it is neither here nor there," says Mr Coates. "No one expects an evangelical conversion in the boardroom."