Christine St Anne: Ethical investing is a top of investment strategy, but does this feel-good approach net good returns for investors? Today, I am joined by Westpac's David Simon to give us the low down on ethical investing. David, welcome.

David Simon: Thank you, Christine.

St Anne: David, what exactly is ethical investing? Does it differ from sustainable investing?

Simon: These themes are thrown across all the time. They are actually the same theme. So ethical investing and sustainable investing mean the same thing. Basically, it's the underlying fundamental values of the investor seeking to invest in assets that has sound attributes when regarding factors such as the social impact or the political impact and indeed the environment meant to impact of the underlying investment security.

St Anne: Can this investment approach result in better returns for investors?

Simon: The general view is that by scoping out certain assets that don't meet the merit of being sustainable or ethical means that they tend to underperform more mainstream investments. A recent survey that was produced in 2011 by the Australian Responsible Investing Association of Australasia actually came out with an interesting finding stating that for several periods the sustainable style investing is actually up for the mainstream investing. So that was quite an interesting report that was delivered.

St Anne: David, a lot of our investors like resource companies. Can these type of companies be included in an ethical portfolio?

Simon: That's a really interesting one, because underlying fund managers have different criteria on how they assess a company to be ethical or not. So some companies operate under a positive screening process and that means the fund manager is actually looking for positive attributes of an underlying security on how they provide positive impacts on society and also the environment, whereas some fund managers actually look for a negative screening process.

So they are really focused on some of the negative impacts that some companies can display on social and also environmental factors. So it's quite difficult to just use the resource component as an area or reason why to scope out some of the assets within a portfolio of ethical investments, but overall, depending on the fund manager, you can still access some resource companies within an ethical portfolio.

St Anne: David, you mentioned managed funds. Is this the best way for investors to access this type of investment?

Simon: Well, accessing investments through a theme of being ethical and sustainable are access to the same vehicles of what you would normally access any mainstream investment, whether they are listed or indeed via a managed fund or even held directly.

So there is no differentiation in terms of how to access these, but interestingly, a recent survey only showed that 1.6 per cent of total investment funds under management are held within ethical or sustainable style of themes. So there is still a lot of interest out there, but that's yet to materialize in actual investment holdings.

St Anne: David, finally what about diversification issues?

Simon: Yes, certainly. You'll find that if you look at a portfolio of assets that have these attributes of sustainable and ethical, there is a wide stream of assets to choose from. There are the obvious ones that you’d have to scope out. So companies that operate within – in weapons or companies that generally operate with tobacco and alcohol are somewhat screened out away from the opportunities say that deliver these types of values and attributes.

What that means is that the investor isn't going to get the same level of diversification. They would if they did go down that mainstream approach. So they need to sort of be conscious about whether they really more focus on the ethical component or their overall investment needs and diversification requirements.

St Anne: David, thanks again for your insights today.

Simon: My pleasure. Thank you.