In its true sense ethical investment, about which reams has been stgoted in an attempt to dissect and define the appropriateness of its increasingly broad application, connotes individual moral judgement. But it has come to be perceived as an umbrella term that incorporates everything from green investing to socially responsible investing to corporate engagement.

Revealing that effective from September the Ethical Investment Association will assume its new persona, the Responsible Investment Association, Executive Director, Louise O’Halloran maintains that the word ethical is unworkable from an investment perspective because it is too subjective and markets are unable to deal with it.

Opting for the term sustainable over ethical O’Halloran distinguishes the two.

She defines ethical investment as investment decisions “based on values and beliefs” and sustainable investment as investment decisions “based on the impact of environmental, social and governance issues on portfolio value”.

She muses about a relevant cartoon in which one person says, I wonder if that company is doing things I don’t agree with and another speculates whether climate change will affect profitability.

Many attribute the inception of ethical investment to the Quakers as far back as the 1800s. Its contemporary model was spawned in the United States in the 1960s during the Vietnam War. In the United Kingdom from the 70s to the 90s it became a tool for the anti-apartheid movement, which boycotted South African and European companies that were financing the apartheid regime and voted with cash.

In Australia the seeds were planted in the 80s as an extension of the environmental movement, which was born out of the anti-Franklin Dam protests.

Hugh Grossman, Head of Research at RepuTex argues that the market is moving beyond the concept of ethical investment. As an investment research house RepuTex assesses corporate risk. “The type of risk we’re assessing is what we call emerging risk, which is fairly generic,” says Grossman. “But basically it means we’re looking at the impact of water, the drought, climate change, carbon etc.

“It’s grown from ethical investment but it’s a lot more tangible and quantitative than merely saying, this stock is in because of the nature of what the company does or doesn’t do.”

Grossman believes that ethical investment will always be around as a niche area but in order for it to grow it needs to be integrated into the mainstream. “Because risk is ultimately mainstream,” he says.

Michael Walsh, Director Corporate Monitor agrees that while ethical funds are currently showing high returns long-term they’re unlikely to perform any stronger than normal funds.

Sustainable and socially responsible investment however, buoyed by the United Nations’ Principles for Responsible Investment, which was launched in April 2006 and has now been signed by around 215 investment funds managing about $10 trillion, is surging around the globe.

O’Halloran points out that in stock broking firms around the world analysts are taking on board environment and social and governance issues into their stock valuations. “It’s a trend that’s going in one direction only and that is up,” she says citing Citigroup, Goldman Sachs and Lehman Bros as leaders of the pack.

She talks hypothetically of a gas company in Canada, which is the darling of the Canadian stock market until an environmental, social and governance analyst discovers a report from the Wilderness Society that shows that the gas reserves are owned by native Canadians who are pissed off at this company because they have abused land rights and are planning not to give them access to more land.

“This new type of analyst is starting to see these issues that are very relevant to the 21st Century and which mainstream analysts don’t think about,” she says.

Civil society is much more powerful than it used to be. We have all become citizen investors through superannuation funds and our ability to undermine companies is significant.

O’Halloran predicts that the move in the mainstream towards picking up the value of widening the analysis spectrum of thinking will cause a huge shift in the investment market in two to three years.

Anne-Marie Spagnolo, author of The Ethical Investor and a financial planner and partner in Melbourne-based financial planning practice Ethical Investment Services, is convinced that a win/win situation is possible.

“I believe we can have companies that look after the environment, treats its employees well and give back to the communities in which they operate and that these aspects can increase the bottom line,” she says.