As the stock market continues to suffer at the hands of a volatile economy, ethical investment has taken a blow, research from Investment Life & Pensions Moneyfacts has revealed.

According to the survey, ethical investment had until now, enjoyed a boom as investors become aware of the difference it can make. However, as budgets are constricted and risk becomes more dangerous, Brits are shying away from ethical funds.

In fact, the results show that the average ethical fund has fallen by 9.1 per cent since the onslaught of the credit crisis last year. In comparison, non-ethical funds have fallen by only 5.7 per cent. This is in stark contrast to last year when ethical funds were out-performing non-ethical funds by 3.3 per cent.

And, when it comes to investing in ethical funds, those faring the worst are UK based funds including Prudential Ethical Trust and Scottish Widows Environmental Investor that have fallen by 20 per cent over the last year.

Speaking of the poor performance, Editor of Investment Life & Pensions Monefacts, Richard Eagling said: “Missing out on the strong performance of sectors such as mining and oil and gas is not the only reason behind the poor recent returns posted by ethical funds.

“The fact that ethical funds tend to have a stronger bias towards smaller and medium sized companies has also had a significant impact, whilst the downturn in the banking sector has further impeded performance, since many ethical and SRI funds have been overweight in financials.”

Nevertheless, according to the research, there is evidence to suggest that during the long term investors can profit from their principles. The survey shows that over three years, ethical investments have significantly outperformed non-ethical funds and have also surpassed returns on the FTSE 100.

Commenting, Mr Eagling added: “In many respects the last 12 months have been a testing time for ethical funds. Falling markets have seen their performance falter more that their mainstream rivals, although given that they have less opportunity to invest in defensive stocks such as oil and tobacco, this should come as little surprise. The latest ethical returns may be slightly disappointing but there are still plenty of reasons to remain confident that these represent no more than a temporary blip.”

© Fair Investment Company Ltd