INVESTING ethically can be a tricky business. Even for an individual it requires a good deal of research, a clear definition of what they consider moral and an understanding of the impact that such an approach may have on returns.

When it comes to trustees deciding how to invest ethically for their charity, there are even more variables. One person may consider businesses with a serious impact on the environment unethical, while others may see companies manufacturing tobacco as an unpalatable investment prospect.

These are emotive issues but, if you’re a trustee of a charity with invested reserves, you need to at least protect the spending power of the capital as well as generate a return to support your charitable activities.

There are studies that suggest that investing ethically hits you in the pocket and there are many others that demonstrate the exact opposite. But what’s clear is that, by ruling out some companies or sectors, the investable universe becomes appreciably smaller.

In fact, if you’re investing in the FTSE 100 and take a highly ethical approach, you could find a reason to not invest in most companies. For example, if you exclude arms, animal testing, manufacturers of tobacco, alcohol, gambling, oil and mining companies that would leave just 46 businesses to choose from.

Going down that road would mean relying on the performance of a heavily reduced number of organisations and sectors, which increases risk and makes it impossible for investments to perform in line with an index. Indeed, if any of the sectors you still have goes through a downturn, you’ll be disproportionately affected.

Last year, research for our report on charity investing found that two-thirds of charities (67 per cent) said the need for income was their main investment concern. Assuming investing ethically removes big oil and tobacco companies from a portfolio at the very least, that would exclude some of the FTSE’s largest income payers, namely Shell, BP, and British American Tobacco.

Even though some of the sectors you are left with – such as insurance, banks and utilities – are high yielding, there’s perhaps limited opportunity for capital growth. Then there’s the consideration that these companies may do business with organisations deemed unethical, a point highlighted in 2011 when RBS hit headlines for financing cluster bomb manufacturers.

The same considerations need to be applied to other types of investment too. Pensions will be invested in many of these companies, as will low-cost tracker funds. Meanwhile, some people may consider governments’ actions to be unethical, a view that could sway their decision to purchase gilts.

So, should charities rule out specific investments on ethical grounds? While charities need to be thoughtful, ultimately it depends on their point of view and purpose.

A charity that supports women in abusive relationships may want to stay clear of the alcohol industry while still investing in oil companies. An environmental charity might feel the reverse applies to them.

Indeed, in Scotland, many grant-making organisations are linked to oil and whisky. To rule out investing in these businesses on ethical grounds could be a charity cutting off its nose to spite its face, and a real dilemma if they’re prepared to accept funding from such grant-making trusts.

Nevertheless, a charity with investments that appear incongruous with its aims and morals can have serious reputational damage. Back in 2013 it emerged that the Church of England was indirectly investing in the payday lender Wonga, a fact that Archbishop of Canterbury Justin Welby referred to as “inconsistent”.

Time and again it’s been shown that investing in stocks and shares is the best way to generate a return, but charities needn’t do it at the expense of their broader aims. They just have to remember what they’re fighting for in the first place.

Lynne Lamont is head of charities for Scotland at Brewin Dolphin.