A moral dilemma

Financial advisers claim investing ethically on behalf of one's children is a booming business, driven largely by liberal-leaning mums who want both their children and the planet to benefit, and a school syllabus which emphasises environmental issues.

But knowing you want to ethically invest is just the first step. Should you go for shares or for bank accounts?

Advisers reckon investing regularly in unit trusts for a youngster should work out well, as equities tend to outperform over longer periods.

There is a huge choice. Some are very strict, investing only in projects with a positive environmental impact. Others might invest in less-than-perfect companies and projects if they are making an effort to change their ways. An ethical financial adviser and the Ethical Investment Research Service (www.eiris.org) can help narrow the options.

Many ISAs and unit trusts let you make minimum contributions of £50 a month - ideal for child benefit, currently £15.50 a week for the first child and £10.35 a week for subsequent children.

Our table (below) details the past performance of some of the top ethical stock market investments. "I would suggest parents pay their child benefit into an ISA," says Donna Bradshaw, at IFA Fiona Price Consultants. "Few parents use anything like their annual ISA allowance of £7,000, yet profits are tax free and both parents can open one." But there are no guarantees with the stock market, so risk-averse parents may head for a savings account.

Here, parents have three main options:

The Triodos Bank, which lends only to charities, and social and environmental projects, has a Young Saver account. It can be opened with just £25 and pays between 2% and 2.75% interest depending on whether you opt for a 33-day, 90-day, or one-year notice period. Bonuses of 1% of the balance are paid after five, eight and 10 years.

The Cooperative Bank also focuses on companies and projects with a positive environmental and social purpose. It has two children's accounts, the Bonus Account and the Future Fund. Interest is 3% for balances of £1 or more, 3.25% for £1000 or more, and 3.50% for £5,000 or more. An annual bonus of £2 for children under the age of 12, and £10 for 13 to 18-year-olds is paid if the average balance is at least £50.

The Ecology building society has no accounts designed specifically for children but its Earthwise mini cash Isa and Eco Instant Share account can both be opened with just £25.

The Earthwise Isa pays 3.10% a year if you make more than one withdrawal and 4.10% a year if you just make one. The Eco Instant Share account pays 1% for deposits up to £499, 1.85% up to £4,999, 2.10% up to £9,000, and 2.35% over £10,000.

Finding out more about ethical money is easy. Jobs & Money has teamed up with fund manager Friends Provident to offer a Guide to Ethical Investment. It's free. Call: 0800-694-6939.

Top ethical trusts
(Regular payment £50 per month invested, offer/bid, net income reinvested at pay date)

Over three years:
Friends Provident Stewardship £1509.15
City Financial Ethical £1271.16
Standard UK Ethical £1270.03
Allchurches Amity £1248.37
Scottish Widows Ethical £1248.36

Over five years:
Friends Provident Stewardship £2629.91
City Financial Ethical £2169.10
NPI Global Care Income £2156.08
Insight Evergreen £2090.99
Scottish Widows Ethical £2088.31

Source: Money Facts

Plans that are on a different planet

Judith Woodard knew nothing about ethical banking until a relative told her about Triodos Bank last year when she asked for ideas about what to do with money given to baby Stella. The married mother of four from Camborne, Cornwall has opened Triodos Young Savers accounts for one-year-old Stella and Solomon, two and a half.

And she plans to open accounts for her nine and 16-year-old sons, Rory and Tom. She will also transfer a United Friendly endowment policy to an ethical account once it matures late next year.

She plans to move all the family finances into ethical vehicles. "I'd always felt uncomfortable investing in a non-ethical way as in the long-term my children are not enriched by it," she says. "I wanted a secure future for them, but not to the detriment of other people. I think we need to enrich the planet, not just our corner of it."

Judith has her child benefit paid into her bank account with HSBC and, from there, transfers £10 a month to Triodos for Solomon and £20 a month for Stella - she gets extra thanks to her godmother.

"I still use HSBC which has investments everywhere - some good, and some I don't like. But I want the children to have something better - I'm conscious that I have to make choices for them," she says.

Judith talks to her children about their investments, helping them understand the financial process. She also enjoys reading the Triodos newsletter which details projects the bank invests in.

"It always makes for really interesting reading and it's good to get more information on how my money is spent," she says. Judith and husband Paul hope to interest Triodos, or another ethical investor, in plans to use some of their six-acre smallholding for an adventure park for children with disabilities - if she gets planning permission.

Starting out in a small way...

Investment trust managers including Baillie Gifford, Edinburgh Fund Managers and Witan have regular savings plans aimed at giving money to children. And so, too, do unit trust groups Invesco Perpetual with the Rupert fund and Aberdeen's Thomas & Friends. All start at between £20 to £30 a month with lump sums from £50 to £400.

But while Witan's Jump links to baby charity Tommy and oth ers offer gifts, family friends should look at these in the same light as other funds. Initial charges - the cash eaten up at the start - varies from nothing at Baillie Gifford to Rupert's 5.25%. And annual charges range from 0.4% at Witan to a 2.23% total expenses ratio at Rupert.

Baillie Gifford has a choice of six funds and Edinburgh Fund Managers offers 11.

Getting over the slump... in the long term

Shares may be slumping but Tony Palmer, 45, is looking to the far future. He has invested lump sums from grandparents and others for his three children, Freddie, 12, Harriet, 10 and Emilie, seven into Jump from Witan Investment Trust. "I've taken a very, very long-term view. It is more for deposits on flats when they start work than to pay school or university costs," he says. "I believe shares will emerge as the best bet over time." Mr Palmer, who runs a bespoke joinery business in south London, and Fiona, his wife looked at a number of rival investment trusts schemes. "We heard about Witan from friends who were involved because it supported Tommy, the charity which looks into pre-birth conditions.

"I liked the overall package and the trust's emphasis on mainstream shares with a lowish risk," he says. The Palmer children share one plan currently worth some £3,000. "They cannot hold shares in their own name until they are 18. We are keeping it for them," he says