Ethical spending has out-stripped retail sales of booze and cigarettes for the first time. What's driving this green spending spree?

The words "ethical" and "consumerism" would once have looked like an unlikely pairing.
Consumers wanted to consume stuff. They wanted to get exactly what they wanted at the best price. Ethical shopping was strictly on the green fringes, where a small band of enthusiasts banged on about animal rights and fair trade.

But in the past decade, the concept of shoppers exercising an ethical choice has become part of the mainstream. Supermarket aisles are devoted to organic products, energy companies promise greener power, banks advertise their ethical investment policies.

Free-range eggs used to be a niche market - now there are supermarkets that sell no other variety. Fair-trade drinks were once marginal - now if you have a coffee in Marks and Spencer, it's the only type they serve.

Eco-awareness

The annual survey of ethical spending in the UK, compiled by the Co-operative Bank, shows a record level of £29.4bn. This means that green spending has overtaken the £28bn spent on alcohol and cigarettes (excluding pubs).

This increase, 11% on the previous year, has been driven by growth in areas such as organic food, fair trade products, green energy deals and ethical financial products. And shoppers are also getting tougher on where they take their custom. In the same survey two years ago, shoppers said they were withholding £2.58bn worth of business from firms with which they disagreed.

But what has been pushing this growth in ethical sales?

The more that people have ready access to fair trade and organic products, the more likely they are to put them into their shopping baskets, global communications have given us a window on the world, as people become more concerned about climate change, food production or poverty, they want their shopping to reflect their values.

It's not just food that has gone green. The overlap of fashion and eco-awareness means that you can buy environmentally-friendly clothes in Top Shop, Marks and Spencer and Monsoon. There are fair-trade footballs, toys made with sustainable wood and holidays are sold with built-in carbon off-sets.
And financial services have a widening range of conscience-driven products. The Co-operative Bank sells itself on its ethical investment policy, and there are various types of green insurance and mortgages and investments.

Whilst the opportunities for growth in this area are huge, we should still not lose sight of the fact it still only represents about 5% of total retail spending. In terms of the financial sector official statistics suggest that ethical investing is still a niche business, accounting for just 1 per cent of retail investment funds overall, but interest is growing sharply.

With a number of investment houses reporting a surge in demand for green funds - not just because of a sudden outbreak of conscience, but because of their performance. Some ethical funds have been doing rather well: Co-operative Insurance's Sustainable Leaders Fund topped the league of UK All Companies funds in the year to January, with a return of 29.3 per cent - more than double the FTSE All Share over the same period; F&C's £3bn Stewardship Income fund - the first ethical fund ever when it was launched more than 20 years ago - is in the Principal White List of consistently good performers in the income sector for the fifth year running; and 70 per cent of the ethical funds in the UK All Companies sector were in the top quarter of the performance tables in 2006.

One key consideration of ethical financial products remains the incentive to the consumer and IFA alike to take the products, should it pay commissions or re-invest in sustainable projects.

As ethical and sustainable investment begin to move more confidently into the mainstream, we should see resolution to conflicts of interest such as these. Now more than ever, you don't need to be in the red to go green.