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They're called screened investments - that is, investments that take into account both financial and social/environmental considerations. That plain description, however, masks a heated debate in the world of ethical and environmental investments.

With the baby boomers now into their 50s and share ownership through the roof, the growth of screened investments was always going to happen, even in Australia. The reason it has now made the transition from fringe to mainstream is that someone finally did their homework. And yes, it turns out that it's possible to make a profit and still get to heaven - all from the comfort of your own home.

But for those intent on saving the planet, the big questions remain: Do you invest in ethical funds or eco funds? Is there a difference, and what kind of returns can you expect?

First, the history lesson. While ethical investments have been around since Biblical times, today's industry grew out of the Vietnam War protests and anti-apartheid movements of the '60s and '70s. The first industries targeted were armaments and anything coming out of South Africa.

During the '80s, the industry began to focus on issues surrounding the environment and to encompass notions of ethical behaviour and corporate social responsibility.

By the '90s, the demographic of share ownership had changed radically, as had superannuation. New superannuants and shareholders were beginning to ask their investment managers a curious question: What is my money actually doing? And they weren't just looking at the financial side of the ledger.

While the size of the industry worldwide is difficult to quantify due to questions of definition, both the US and the UK have large and well-established screened investment products on offer. In the UK, they grew from $1.7 billion in 1998 to more than $7.2 billion in 1999. This explosive growth was due in large part to new UK pension laws that come into effect on July 1.

The new legislation requires all funds to state their ethical policy - or lack of one - as a matter of course.

According to a number of investors, this has created an instant market advantage for ethical funds, with many funds currently in the process of introducing screening as a result. Most notably, Friends Provident, a UK fund with $15 billion under management, has announced screening across all its funds. Likewise, fund manager Prudential is set to introduce screening on its £140 billion ($350 billion) investment portfolio. (This portfolio equals roughly 85 per cent of the total pool of Australian superannuation savings.)

The overall number of ethical funds throughout the UK and Europe has more than doubled to 36 in the past five years.

In the US, screened funds have been around much longer and are said to account for one dollar in every 10 currently under management, or $3.5 trillion. But that includes funds that screen for one factor only - for instance, armaments, tobacco, gambling or alcohol. The number that fit the Australian understanding of ethical or environmental is harder to pinpoint. Nonetheless, until recently the Australian industry could boast no counterpart of such size, with long-time players Ethical Investments Australia and Hunter Hall Investment Managers having $85 million and $120 million respectively under management.

Then along came HESTA and Unisuper with their $9 billion under management, which they used to launch the Eco Pool environmental fund. Not to be outdone, Westpac has just created its own environmentally screened investment fund with $45 million under management, and AMP is in hot pursuit. Should superannuation of choice ever become a reality, demand for this kind of fund could well outstrip supply, according to a number of industry players.

The past 18 months has witnessed exponential growth, largely as a result of research by Westpac. In 1998, Ecos Corporation conducted a major survey of the environmental performance of 150 Australian companies. The survey and screen were derived from work done by the World Business Council for Sustainable Development, as well as Storebrand-Scudder and UBS. The questionnaire sent to companies included 19 variables, covering such areas as environmental policy and programs, eco-efficiency, products and services and stakeholder engagement.

They finally included 58 companies in their analysis, on account of the limited corporate environmental information available in Australia. They then ranked these as "good", "fair" and "poor" environmental performers. Westpac Investment Management back-tested the portfolio and found that during the period 1990 to 1998, the 21 stocks ranked as "good" had outperformed the All Ordinaries Index by 4 per cent a year.

These results are consistent with a number of US and UK studies on socially responsible investing. For instance, the US-based Domini Social Index recently released its five-year annualised results. That index attracted returns of 27.31 per cent over five years, compared with the S&P 500 Index which returned 25.3 per cent and the S&P Mid-Cap Index which returned 18.5 per cent.

According to Eric Mather, senior manager, screened investments, Westpac, the reason these corporations outperform the rest is simple. "If a management team has thought through the consequences of its actions on the environment, it makes sense to presume they're in the habit of thinking through their actions on all levels. In short, they're probably a very good management team."

Eco funds of this kind are also advantaged by the implicit containment of risk. For instance, had BHP's performance at Ok Tedi been environmentally sustainable or even containable, it wouldn't be facing a large compensation bill today, nor would it be forced to defend itself against the recent charges relating to its new Ekati diamond mine in Canada's North-West Territories.

Likewise, companies investing in renewable energies are unlikely to be adversely affected by the implementation of the Kyoto Protocol - quite the opposite.

Nor would the ratification of the Biosafety Protocol disadvantage exporters of GM-free produce.

But the report goes on to introduce what has become the cornerstone of the current debate surrounding ethical versus environmental screenings, saying: "We believe the 'best of sector' approach to portfolio construction is the key to generating consistent screened investment returns. Best of sector stands in contrast to traditional negative/positive screening processes that can result in risky portfolio biases. Best of sector is an investment approach that gives consideration to companies in all industry sectors but in portfolio construction prefers companies with superior performance under a given screen."

This means that while all companies under consideration will have an environmental screen applied to them, no companies will be screened out with a negative screen. For instance, best of sector does not automatically rule out mining (including uranium mines), petrol or chemical companies. It does, however, favour those companies with the best track record in the environmental management of their mines/rigs/ manufacturing processes. It also favours those companies that are moving in the direction of sustainable development.

For instance, while Shell is still up to its neck in the oil business, the fact that it is now positioning itself as an energy company, with interests in renewables like fuel cells, suggests that it has some commitment to sustainable development over the long term.

While Westpac manages the fund, it is Monash University that is charged with screening the companies and being the eyes and ears of the bank.

According to Chris Fayers, research fellow with the Monash Centre for Environmental Management, this kind of screening creates a "light green fund".

"This is not a deep green fund," Fayers says.

"It's light green because you could be taking the best of a bad bunch, environmentally speaking, particularly in the resources sector.

"Nonetheless, because we have super funds as our clients, the fund needs to have a broad appeal, with low risk and solid returns."

In order to reduce the risk further, the fund needs to be spread across a large number of companies. Unfortunately, environmental screening of the top 200 Australian companies has been hampered by the lack of awareness in many companies regarding the need for environmental audits.

For a company to be ranked as "good" environmentally, it needs to have addressed four dimensions of its operations.

First, strategy: does it have a strategy in place to move towards sustainable development, and best practice in its environmental performance?

Second, management: has the company internalised its decision making? Has it factored the environment into its accounting? Does it have an environmental policy?

Third, operations/product: are they eco-efficient? Is the product the best it can be for the environment?

Finally, stakeholder management: has it signed up to protocols such as Kyoto and Biosafety? Is it a signatory to codes of practice within its industry?

This approach to investing would not come close to satisfying the demands of those concerned with deep ecology, nor would it satisfy various religious groups or NGOs. It does, however, appear to satisfy the demands of many Australian investors keen to do their bit for the environment, though not willing to stake their retirement on it.

In fact, this form of screening came as a result of HESTA asking its membership what values they would like to see reflected in their super investments.

"We asked the membership - through focus groups - to tell us what kind of fund they would like to belong to," says Anne-Marie Darke, investment manager of HESTA, "and they told us they favoured an environmental fund, not a purely ethical fund.

"That is, they felt they should take personal responsibility for whether they smoked, drank or gambled, so they weren't too concerned about screening those things out.

"But the environment was something they felt strongly about and were less able to affect as individuals. So we created this Eco Pool to reflect our membership's values."

On the other side of the debate are the traditional ethical funds like Tyndall Investment Management, Hunter Hall and Australian Ethical Investments.

While Tyndall has returned an underwhelming return of negative 11.6 per cent over the past year (its management has just been taken over by Challenger International), Hunter Hall and AEI have both shown solid performances with Hunter Hall averaging 29.7 per cent while AEI's Equities Trust has returned 26 per cent and its Large Companies Share Trust 24 per cent over the same period.

They do this, not in spite of being ethical funds, but because they are ethical funds, according to James Thier of AEI.

"Over time, investors have become more sophisticated about where their money is going and the return on their investment. AEI is not motivated by greed but is interested in solid, sensible investments which concentrate on business fundamentals.

"There are different shades and complexions between ethical funds and eco funds. An eco fund doesn't concern itself with social issues like tobacco or gambling, human rights abuses or labour practices. Because we use both positive and negative screens, we can screen out the best of the worst and screen in those making a positive contribution."

The are two other points of departure between eco and ethical funds. The first is the question of transparency. Ethical funds go to great length to ensure investors know exactly where their money is going and why it's going there. Eco funds are constrained by commercial in-confidence issues and therefore more reliant on the watchfulness of the monitoring body - in the case of HESTA's Eco Pool, this is Westpac.

The second is the small company bias shown by ethical investment funds. While this enables them to invest in a number of small, sunshine industries, it can also constrain the spread of companies available to them.

This is one reason behind AEI's move into the Large Companies Share Trust, a trust it is now offering on a wholesale basis to institutional and large private investors.

While debate continues about the definition of ethical versus environmental, it is worth remembering that the Socratic philosophical framework underpinning ethical investments of any shade demands only one undertaking. That is that the investor be aware and conscious of the decisions they are making. If, for instance, an investor decided to invest in uranium after weighing up the pros and cons of the debate, that would become an ethical investment, despite the fact it runs counter to environmentalists' views on the matter.

Philosophically speaking, consciousness is what separates an ethical investment from an unethical one.