Vincent Tchenguiz's Consensus Group has said it will not accept investment from the arms industry in its $125 million environmental fund after the World Bank, its partner in the venture, expressed concerns.

Last week it emerged that international defence companies would be allowed to buy from the fund vital green credits needed to help them win sales arms contracts. In turn, the fund, called Evolution One, would use the money to invest in a range of green technology ventures in and around South Africa.

However, the managers of the fund and the International Finance Corporation, the member of the World Bank Group that struck the original investment deal, have agreed to ban the fund from striking military offset deals.

It is understood that the deal has forced the World Bank to clarify what industries with which it can trade.

Guy Baxter, head of Consensus in South Africa, told The Times: "Evolution One Fund has been approved for offset by the South African government. Companies investing in the fund can therefore receive credits which can be used to discharge their offset obligations. The fund has ruled out investments from companies looking to offset obligations related to arms deals or military contracts, and offset credits generated by the fund will not be used to offset such obligations."

Off-set payments typically are used to invest in building schools and hospitals but increasingly governments use the payments to develop so-called green technologies such as biofuels.

Evolution One will now concentrate on raising funding from international aerospace and engineering companies.

Members of the Evolution Investment Management board also include Zuko Kubukeli of Pan-African Capital Holdings, a finance company held by black South Africans and chaired by Wiseman Nkuhlu, the economic advisor to President Thabo Mbeki.

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