Green Funds That Really Grow

Green Funds That Really Grow

Jon Naimon is no tree hugger. He won't chain himself to a redwood, ram his boat into a whaling vessel or join a World Trade Organization riot.

But Naimon is as green as they come, especially if an ecologically friendly investment produces the stuff that doesn't grow on trees.

"I am not an activist," says Naimon, the soft-spoken president of Seattle-based Light Green Advisors, which offers investment funds filled with ecologically responsible companies. "My job is to get a return for our investors."

Not so long ago, ecologically responsible investing foundered for one simple reason: It did not make money.

But not anymore. Today, green funds make up a growing share of socially responsible mutual funds, which are becoming increasingly lucrative for investors.

Investors poured nearly $3 trillion into socially screened portfolios last year, compared with $639 billion in 1995, according to the Social Investment Forum. Seventy-nine percent of such portfolios focus on companies' environmental records, up from 37 percent in 1997. Socially responsible funds have regularly outperformed established benchmarks like the Standard & Poor's 500 and the Morgan Stanley World Index.

"Socially responsible funds have really come into their own," said Catherine Hickey, an analyst with Chicago-based Morningstar, which tracks and rates mutual funds. "It's definitely not a fluke."

Green-fund managers have historically adopted either a "positive" screen, which rewards companies with solid environmental records and encourages others to do the same, or a "sin" screen, which warns investors to steer clear of some companies.

Today, most green funds choose a positive screen. Some managers, such as Jack Robinson, president of Boston-based Winslow Management, believe companies respond better to financial persuasion when there are incentives.

"Screening out is not the solution," said Robinson, whose company manages the Green Century Balance Fund, a well-respected eco-fund. "Screening in is the solution."

Naimon has a different use for positive screens. Early green funds died out, he said, because they automatically excluded every company in industries thought to have poor environmental records, such as oil and automobiles. The resulting funds were philosophically pure but financially weak.

Naimon instead advocates a "best of the class" approach that ranks a company's financial and environmental record within its industry. That's why his Eco-Index, which tracks all major S&P 500 industry groups, includes such names as Exxon Mobil, Ford and Anheuser-Busch - companies whose environmental records aren't perfect.

Since 1998, Light Green Advisors' assets have more than quadrupled, from $10 million to $42 million. Its Eco-Index has done slightly better than the S&P 500 this year.

Apartheid Focused Movement

Social investing dates back centuries, but it did not come into the spotlight until the movement here against the South African apartheid government during the 1970s and '80s, said Alisa Gravitz, vice president of the Social Investment Forum.

Frustrated at the slow pace of economic sanctions against the apartheid state, investors focused their ire on American companies operating in South Africa by selling their stock in those companies.

"All of a sudden, there was a way for individuals to get involved," said Gravitz.

Since then, high-profile events such as Earth Day and issues such as global warming have kept the environment in the minds of politicians and investors, she said.

But is green investing simply an exercise to satisfy one's conscience, or can a company's environmental policy be linked to its profitability?

Green-fund advocates typically argue that a company's environmental liabilities can hurt its bottom line and market value, especially in an age of tougher pollution laws and federal regulations. If a corporation is liable for large environmental cleanups and penalties, green-fund advocates say, profits will shrink and investors will flee.

"If you don't create a Superfund site, then you don't have to clean it up," Winslow Management's Robinson said.

Becoming a Business Issue

But others say eco-friendly products and policies can offer a company a strategic advantage.

Matthew Kiernan, founder of New York-based Innovest Strategic Value Advisors, said eco-friendly companies attract not only customers, but also employees more familiar with environmental issues who can put that knowledge to work for the companies.

The most recent example, Kiernan said, is BP Amoco's "Beyond Petroleum" marketing campaign, which seeks to portray itself as a progressive, ecologically friendly retailer of the future.

"The environment is increasingly being seen as a business issue rather than a regulation issue," said Kiernan.

Some of the hottest growth industries include organic food products and development of alternative energy sources, such as solar fuel cells.

Portfolio21, a Portland-based green fund, invests in companies that develop sustainable products that conserve natural resources and do not pollute the environment. Members of the fund include Ericsson, which reduced the energy consumption of its cell phones, and Hewlett-Packard, whose DeskJet printers require fewer manufactured parts. Since its debut last September, the fund's return has been 19.2 percent.

High-techs Dominate Funds

Critics say green funds are dominated by the high-tech and financial-services sectors, two industries that do not carry the same environmental risks as, say, auto-parts manufacturing. And it's no coincidence that technology stocks are the driving force behind the bull market, which has led to spectacular returns for all investment funds. As a result, a large number of socially responsible funds have sprung up during the last decade, Social Investment Forum data shows, just as the economy became bullish.

What will be key, green managers acknowledge, is how well these funds perform when the market turns sour. "It's hard to tell because we haven't had anything but a bull market," Morningstar's Hickey said.

Green funds also have yet to gain widespread acceptance among investment managers.

"There is a mainstream view on Wall Street that if you pursue green companies, you are going to pay a financial penalty," said Kiernan. "They feel such companies spend their money on frivolous things, which hurts profits."

Green Makes Gains in Pensions

Yet one thing is clear: Socially responsible investing is gaining popularity. John Shields, president of Citizen Funds, said socially screened portfolios are finding converts in the pension industry, especially as the baby-boomer generation begins to retire.

His clients include New York state, Alaska and Estee Lauder.

Wade Fox, investment-product manager for New York Life Benefit Services, said companies pick screened portfolios for their 401(k) plans that reflect their corporate philosophy and community involvement.

"I wouldn't call (screened portfolios) a staple in most 401(k)s, but we have seen a trend," Fox said.

And companies such as Starbucks and Weyerhaeuser now regularly respond to requests for environmental data.

"It certainly is something that is getting more attention," said Bruce Amundson, a spokesman for Weyerhaeuser. "Most investors still look at the financial data, but (the environment) is at least factoring in their investment decisions."

-----------------

RELATED LINKS:

Investing With Your Values: Making Money and Making a Difference

Event: Triple Bottom Line Investing 2000

UK Pension Funds Bank on Social Responsibility