.. and places to do trade with

More and more universities are switching their investments to ethical portfolios as evidence grows of the financial and PR benefits of responding to student lobbying.

Oxford University, which invests £400 million in the arms trade, is regarded as one of the worst offenders among British universities for unethical investment. But this could be set to change. Students at Wolfson, Oxford's largest postgraduate college, have voted overwhelmingly in favour of withdrawing investment from companies that they deem to be socially harmful. The blacklist includes arms manufacturers BAE Systems, Smiths and Rolls-Royce, as well as Imperial Tobacco and companies such as Shell, whose activities have been criticised for being destructive to the environment. The governing body will decide whether to proceed with divestment later this month.

This move follows the current trend for ethical investment at UK higher education institutions. Edinburgh and Manchester universities and the School of Oriental and African Studies all have socially responsible investment policies, while University College London, Bangor and Lancaster universities are among those currently in negotiations.

Given that financial pressure on universities is at an all-time high, how can these institutions afford to put ethical integrity before financial prudence? The answer could be that a trade-off is no longer necessary. Evidence is accumulating that ethical investment is at least as profitable as buying off the-shelf shares.

Last year, for the first time, an ethical fund, the Co-operative Insurance Trust, topped the UK all-companies growth league over a 12-month period. And recent research by Deutsche Bank suggests that the Co-op fund isn't a one-off. It found that when the FTSE 350 companies are ranked according to sustainable and responsible investments criteria, the top 10 per cent outperform the bottom 10 per cent in financial returns by more than 7.5 per cent a year.

"It comes as a surprise to people that ethical investment doesn't mean lower returns," says Niklas Kreander, a lecturer in accounting and finance at Glasgow University who has published research on the financial performance of ethical shares. "In our research, we not only found there's no significant difference in returns from ethical funds but also that they aren't any riskier, which makes them a good investment long-term."

This is exactly the kind of evidence required by the financial decision-makers at universities. Stephen Palmer, the bursar at Wolfson College, says he is open to ethical investment, but that his first responsibility is to look after the college's financial interests.

"In the past, a lot of people have speculated that divestment in certain companies might lead to lower returns," he says. "If there's a suggestion that the reverse may be true, I'd be keen to see the data."

Those campaigning for a change in policy at Oxford are equally aware of the need for a compelling economic case. "The financial argument has to be won," says Lily Soucy of Wolfson Ethics and Environment Society.

Until recently, many universities have viewed ethical investment in the same way as the decision to buy fair-trade coffee - good for your conscience, but not for your wallet. Kreander suggests several reasons why this might not be the case. "Fulfilling ethical criteria could be a predictor for good management," he says. "For example, companies that are socially responsible in the way they operate may also be more likely to take good care of their employees, which makes for a more productive company."

In addition, companies deemed to be socially responsible are less likely to be subject to boycotts, prosecution or environmental fines, all of which can be financially damaging, Kreander adds.

Consumer choice could be another factor. The profit-obsessed corporate culture of the 1980s and 1990s has been replaced with a call for long-term sustainability. Ethical and environmental issues are now high on the agenda for many investors and, of course, being popular with investors leads to higher revenue.

The same argument could have knock-on implications for universities looking to attract outside investment. Funding from charities, corporate and individual donors and alumni now makes up 16 per cent of the UK university research budget. As the issue of ethical investment grows in the public consciousness, it may become undesirable to be associated with institutions that ignore it.

Meanwhile, rebranding as an ethically aware organisation could be a smart move for universities looking to boost their attractiveness with philanthropists. This is one line of persuasion taken up by student lobbyists at Wolfson. "At a relatively new institution like Wolfson, alumni networks aren't yet well developed," Soucy says. "The college is likely to depend a lot more on alumni donations and being an ethical investor will look good."

One issue that remains contentious is the precise definition of "ethical investment" and the criteria vary across institutions that already have policies implemented. While many would agree that the practices of arms manufacturers are morally dubious, deciding which companies to divest from is more complicated. Rolls-Royce, for instance, powers about 25 per cent of the world's military aircraft, but it also produces engines for non-military purposes. Another example is Reed Elsevier, whose main revenue comes from publishing scientific journals but has been involved in organising arms fairs. (In fact, the company will quit this sector by the year's end because of investor pressure.)

And even the choice to withdraw investment leaves people divided. "I think Wolfson will have an ethical investment policy by next year, but divestment is just one option," Palmer says. "Some would say that you can influence a company better from the inside."

However, others argue that positive engagement with companies does not send out a sufficiently clear message. The policy put forward at Wolfson recommends not investing in tobacco companies, companies that generate more than 10 per cent of their revenue through the arms trade or companies with poor environmental records.

Another driving force toward ethical investment is increasing pressure from students. In 2006, 5,000 Oxford students signed a petition to change investment policy for central funds at the university. A review is now in progress. Successful campaigns have previously been mounted at Edinburgh, Soas and University College London.

There is no doubt that the greater financial investment made by students themselves since the introduction of tuition fees has made them more liable to hold institutions to account. With maximum allowed fees set to rise to Pounds 3,070 a year in September, student lobbying can be expected to increase.

Far from being the sole preserve of "peace and love" activists, ethical investment could represent a shrewd economic move for UK higher education institutions.

Hannah Devlin is a PhD student at Oxford University.