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Going Beyond the Hype of Green Investing

An initial roadmap for navigating the growing number of "green" funds and ETFs.

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It seems these days that everywhere we look we're being asked to "go green." With all the attention surrounding Al Gore's documentary, "An Inconvenient Truth," and his new Nobel Prize, it's not surprising we're seeing a growing number of mutual funds and ETFs touting green credentials. As a result, we'd like to assist investors in identifying the strongest investment options among this growing fund and ETF niche.

The Latest Green Wave
This isn't the first time we've seen green. Since the oil scare of the 1970s, we've seen environmentally oriented mutual funds pop up from time to time. But a number of funds ended up closing up shop due to light investor interest or lackluster performance. Even so, there is a growing consensus among scientists, policy makers, and investment pros that alternative forms of energy will be necessary to meet global demand in coming decades. And the regulatory environment around climate change will likely have a significant impact on businesses in multiple industries. As a result, a broad range of companies, from fledgling startups to multinational corporations to a host of new consulting firms, are examining how climate-related factors may have an impact on their bottom lines. Similarly, heavyweight institutional investors such as pension funds, investment banks, and insurance companies are working together to navigate the transition to a greener world. That combination of factors has us thinking green investing could be more than a passing fad.

What Does Green Mean?
We've seen several approaches to green investing. We call one style the "best-in-breed" approach, in which the idea is to invest in companies with industry-leading environmental track records. That tack guides Green Century Equity (GCEQX), which currently owns  Proctor & Gamble (PG) and  3M Company (MMM) because its managers consider them to be among the greenest operators in their industries. We also see funds like  Winslow Green Growth (WGGFX) that invest in "clean" companies, meaning those that have no negative environmental impact. Lastly, a number of funds invest in "environmentally proactive" firms that produce goods or services linked to green initiatives like alternative energy, energy efficiency, emissions reduction, water distribution, and agriculture. Such options include the Guinness Atkinson Alternative Energy Fund (GAAEX) and the ETF  PowerShares WilderHill Clean Energy (PBW). Some funds blend several styles, such as Spectra Green (SPEGX) and Portfolio 21 (PORTX).

Michael Herbst does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.