"We monitor the returns carefully and it's actually been running slightly ahead of the market as a whole," says Theodoreson.
The ethical fund is managed by UBS but, in order to reduce volatility, half the pension is in an index tracking fund run by Legal and General. Although the Barnardo's scheme is largely exclusionary, it does include one positive engagement element, which is to use its investment to put pressure on companies that exploit children in their advertising.
"We've never put it into practice because no company hasn't fallen foul of that rule," says Theodoreson.
Ironically, of those staff that have paid additional voluntary contributions to the pension fund, relatively few have chosen the ethical option.
"I'm don't believe that's because staff don't care about ethical issues, but rather because the whole issue of pensions is a complicated area and people can be a bit confused by all the options," he says.
THE CASE FOR ...
Lee Coates, director of independent financial advisers, the Ethical Investors Group
A number of reports have found that most charities are failing to take the ethical issue seriously. I find this surprising, given all the moves to tighten up charity reporting. The greatest problem lies with charities that rely on public donations and goodwill to maintain their activities.
If the public knew just how little attention charities paid to this area they would be inclined to change their loyalties.
For the average charity, probably the most sensible option is the group stakeholder pension and some of the best pension providers are able to offer ethical funds, which are also among the best performing. Larger charities may need a group-money purchase arrangement and again ethical options are available. For the very largest charities the final salary scheme may be appropriate and, even here, the trustees will be able to appoint managers to run the fund along ethical principles.
... AND AGAINST
Charles Mesquita, charity specialist, Carr Sheppards Crosthwaite Socially responsibly investment sounds laudable, but there can be complications.
Those who talk about positive engagement by charity investors should remember that charity investments total only 3 per cent of the total, which is a fairly small voice. There's also a cost attached if you want to ask companies questions at AGMs and so on. And what happens if you challenge a company leading to a fall in its share price? Is that a good outcome?
How far do you go with screening out? For example, you can exclude tobacco firms from a portfolio with a negligible impact, but what about the manufacturers of cigarette cartons or the supermarkets that sell the product?
While big charities such as WWF have the resources to challenge companies and so on, smaller charities don't have the funds for segregated portfolios, and it can be hard to find a pooled fund to reflect individual ethical stances.
While many charities run ethical investment schemes, most do not apply the same criteria to their own pension portfolios. Patrick McCurry investigates why charities fall into this dual approach.
Time and again, charities have been tarred with bad publicity after it emerged that they were investing in companies directly opposed to the charity's mission. These 'reputation risks' may apply not only to the charity's own funds, but also to its pension scheme investments.
But introducing an ethical or socially responsible investment element to pension investment raises several issues for charities. These include whether a charity believes it should apply the same ethical criteria to its pension investments as to its general funds.
After all, in the case of final salary schemes, in which the pension someone receives is based on their final salary and 'guaranteed' by the employer, the charity could end up footing the bill if returns underperform in the market.
One of the main arguments in favour of ethical/SRI pension funds is that it is important for charities not to invest in companies involved in activities that go against the charity's aims - such as a cancer charity excluding tobacco stocks from its investments , for example.
But this is not a view that seems to be taken across the board. The RSPCA has a rigorous ethical policy for the charity's own funds, which are not invested in companies that use animal testing. The RSPCA's pension fund, however, is invested in a different way. Although managed in "a socially responsible manner", it does not apply the same exclusions. The reason for this, the RSPCA's director of support services Mark Watts explains, is that the pension fund is managed by a different set of trustees. "The two funds have different objectives," he says.
Martin Birch, finance director at Christian Aid, agrees that much will depend on individual circumstances of any pension fund as to the ethical criteria that trustees feel comfortable with.
"Both investments should have an ethical element but there may be differences in the detail of how it applies, depending on the size and circumstances of the pension fund," he says. "You could imagine a charity with a large and mature pension fund wanting to take a slightly different ethical approach than to its short-term investments."
Birch says that although interest in ethical investment and in ethical pensions has been growing in recent years, he was disappointed that a Christian Aid/Oxfam ethical pension fund did not elicit more of a response.
The two charities came together through the Pensions Trust, which provides pensions to the voluntary sector, to launch an ethical fund in January 2001. They were hoping that other charities would join them in creating a large fund that would have the muscle to lobby companies on ethical issues.
But dissatisfaction with the performance of the scheme's fund manager led Christian Aid to subsequently move its pension funds to a Legal & General pooled fund tracking the FTSE4Good Index.
"It was a shame that other charities did not buy into the original concept," says Birch, adding that the wider debate in the sector over final salary schemes and the uncertain stock market probably contributed to the inertia.
Birch denies that the FTSE4Good tracker fund is a "watering down" of the original fund: "The positive engagement side of the previous fund is not offered in the FTSE4Good fund, but we're considering using another fund manager, alongside Legal & General, to provide that service."
In contrast to the 'screening out' approach, an SRI policy often involves 'positive engagement' with companies. This means putting pressure on those that the charity has invested in to improve their record in areas such as the environment. This kind of pressure may be brought to bear through voting at annual general meetings or through correspondence with the charity's investment manager.
In reality, most charities do not have any ethical or SRI elements to their general investments or pensions, but things are slowly changing.
According to research by the Just Pensions group last year, 60 per cent of 57 leading charities had no written ethical or SRI policy. Of those that did, the vast majority were focused on screening out investments rather than positive engagement with companies.
Michel Bernard, director of institutional funds at Isis, an investment house specialising in ethical and SRI funds, says: "I feel strongly that charity pension funds should be invested in line with the raison d'etre of the charity. Whether that results in screening out investments or positive engagement is up to the individual charity."
Lee Coates, director of independent financial advisers the Ethical Investors Group, says trustees must be careful to match any ethical policy for their pension with the charity's mission statement.
"It is vital that trustees do not apply their own personal values when drafting the criteria, but stick strictly to what is said in their mission statement and what is in the trust deed," he says.
Coates adds that the Charity Commission now expect trustees to apply their mission statement and objectives to all areas of their operations: "This must, therefore, include the pension scheme."
Isis's Bernard also disputes the oft-heard claim that ethical investments are likely to perform worse than average, because by excluding significant chunks of the market, portfolios become volatile.
"There's no evidence that ethical is better or worse than conventional investment," says Bernard. "There's been a lot of academic research, but nothing conclusive because the findings often depend on issues such as which benchmark you use."
Coates concurs: "While gurus with a blinkered view of ethical investment may claim that it doesn't perform as well as conventional investment, the facts do not support this."
He adds that a 2002 report by West LB Panmure into the SRI market found that there was no sign of "systematic performance disadvantage".
But Richard Stroud, chief executive of the Pensions Trust, an occupational pension scheme for the voluntary sector, is less sanguine. "Charity pension fund trustees must recognise that ethical investments will give a different - which isn't to say worse - return than conventional investment."
This "different" return, says Stroud, means the trustees could end up with lower returns than if they'd put their money into mainstream investments.
The Pensions Trust does offer an ethical fund for its money-purchase clients, in other words for pensions in which the individual rather than the employer bears the investment risk.
"The performance of that fund has been pretty good but very volatile," he says.
Many people who have considered the ethical area acknowledge its extreme complexity. For example, Barnardo's finance director Ian Theodoreson points out that the charity excludes companies that are considered to exploit children in the manufacture of products.
He says: "This isn't a clear-cut issue and I know that Eiris are developing criteria to look at this area. One has to be sensitive to local circumstances, in that it may not be appropriate to take immediate action against a company because if that company were then to suddenly shut down, factories the families of children working there would be deprived of a livelihood. It's a delicate balance."
Stroud also highlights the issue of the attitude of investment managers.
The Pensions Trust takes into account how active the various fund managers are - or are willing to be - in ethical investment when it is considering appointing or changing managers.
"The problem is that you may get an investment manager who is not very interested in SRI but has a good track record," says Stroud. "Or a manager who is very interested in SRI but doesn't have a great track record. So what do you do then?"
Stroud argues that SRI has "more going for it" than the traditional screening out approach of ethical investment. Supporters of SRI say it offers a more flexible approach to investment that, unlike ethical, does not increase volatility.
Coates acknowledges that running a screened investment is much more difficult than a conventional portfolio, but that it does not necessarily lead to a performance disadvantage.
"In reality, the greatest handicap to good long-term returns is the ability of the fund manager and not the ethical criteria applied. All too often, the comment 'if you invest ethically, you will get lower returns' actually means 'I can't do it, so I will persuade you not to bother'," he says.
CASE STUDY: BARNARDO'S
Half of the Barnardo's pension fund has been invested ethically since 1999 when the charity introduced changes to its general investment policy.
Ian Theodoreson, finance director at Barnardo's, says it was challenging to come up with a policy that excluded some companies without negatively affecting returns.
The Barnardo's policy excludes major arms producers, pornographers, tobacco companies and companies that are considered to exploit children.