Trey Nichols, literary director at the Moving Arts Theater in Los Angeles, has a truly global view of his finances.
"I do not expect so much as hope my investments will make the world a better place while making money for me," Nichols says. While he says would like his investments to have a positive impact on the environment, right now he is like most people — just focusing on getting the best return he can on the money he sets aside.
Nichols adds that while his retirement account currently doesn't have green-investment options, "I would like to think we are approaching a time where a true balance can be achieved in terms of profits and long-term [environmental] sustainability."
Green is fast becoming the shade of the times. From environmentally sensitive family entertainment to house paint, every aspect of our daily lives suddenly seems destined to come in an earth-friendly tone.
Even Wall Street recognizes the potential for green, as evidenced by the stock prices of newly public solar-power companies, which are rising faster than the cost of crude oil.
Lloyd Kurtz, a portfolio manager with Nelson Capital Management in Palo Alto, Calif., whose job involves aligning clients’ social ideology with their portfolios, warns against confusing dreams for a greener tomorrow with economic realities. Although they may offer upsides for the environment, a sharp drop in oil prices could quickly dampen the earnings prospects for many of these newly created green energy companies.
Kurtz also warns about pinning too many hopes and dollars on any one company’s prospects. "Remember all the [once-hot software companies] of 1985? Basically only Microsoft is left today. Don’t buy only one wind company, or one solar company. Buy them in bundles either through mutual funds or ETFs. Otherwise, there is just too much risk in the game," says Kurtz.
While the term "green investing" is today mostly associated with buying stocks of companies with cleaner ways of extracting and producing energy, it has existed for some time with a much broader definition as a subset of socially responsible investing.
“We have focused on green investing for over 25 years,” says Lily Donge, a senior social research analyst with Bethesda, Md.-based Calvert, which manages a family of socially responsible mutual funds, which offer greater diversification along with more than a hint of "green."
While she looks for investment prospects among companies involved in emerging green technologies, at Calvert being green requires her to look at how a company’s current and past operations impact (and impacted) the environment. She also analyzes social responsibility more broadly, including labor practices, community impact and corporate governance. Even then, no matter how clean the operation, any involvement with tobacco, guns or alcohol is strictly forbidden.
“General Electric, for example, is not among our holdings due to its historical [environmental] performance,” says Donge, adding that its involvement in building jet engines and power plants is also problematic.
But other green investors celebrate GE’s recent Ecomagination campaign to improve energy efficiency, given that the company is boosting production of energy-efficient light bulbs and appliances, solar-powered generators, wind turbines and cleaner-burning coal plants.
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Such differing shades of green are why Michael Herbst, a mutual fund analyst with the research firm Morningstar, advises: “Investors should look beyond fund labels and consider the investment merits of each fund’s screening process and the resulting holdings.”
While Morningstar recognizes nine "green-only" mutual funds currently, those funds represent a broad spectrum of investment processes and strategies.
"Some of these funds use negative screens. For instance, they won’t invest in fossil fuels or nuclear power. Others use positive screens, meaning they invest in products and services that enhance sustainability on a global scale," explains Herbst. An example of the latter is the Winslow Green Growth Fund, which acts more like an alternative-energy sector fund.
Aside from screens, some funds, including the more diversified Calvert funds, use "best in breed" benchmarks or relativity to identify prospective holdings. This results in more diversified portfolios.
"The strategy enables us to have exposure to energy and utility companies [two sectors which have done very well for investors in the last year]. But we still favor utilities like Hawaiian Electric, which does a lot in the area of energy efficiency and solar power." For direct energy exposure, Calvert sticks with companies involved with domestic natural gas rather than those involved in environmentally messy oil exploration and drilling.
But even if an investor is comfortable with a fund’s definitions, performance is still an issue. While matching ideology to investment portfolios is admirable it does not necessarily result in the best returns on one’s money.
"As an investor you need to look past the hype and noise of green investing and evaluate the investment merits of the funds. Basically, the companies they own should be able to show up in any growth portfolio because they just offer good prospects and are well-run," says Kurtz.
He also observes that as more mainstream companies recognize there is a competitive advantage to improving their environmental policies — conservation and sustainability initiatives are actually good for bottom lines because they often reduce costs — well-managed fund portfolios in general will begin taking on greener hues without extra work on investors’ part.
As an investor, Trey Nichols would appreciate that. “I confess I am a bit too lazy to look for socially responsible investments on my own. But I would like to see my retirement fund’s managers doing that for me.”