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The shades of green investing

When green investment funds include Exxon Mobil and Wal-Mart, it’s time to look behind the label.

The Claymore LGA Green ETF launched this past December focused on investments that “correspond generally to the performance of an equity index called the Light Green Eco* Index.”

Comprised of defense giants Boeing and Lockheed Martin and boasting a top holding responsible for one of the largest man-made environmental disasters in history, eco-light it is.

Exxon: oil spill legend to eco-stock pick

Two decades ago environmental investing was in its infancy spurred on by environmental catastrophes like Chernobyl, Bhopal and Exxon Valdez, what the Social Investment Forum calls “flashpoints for investor concerns over pollution and corporate responsibility.”

In the past several years, investors have recognized that socially responsible investing (SRI) makes money; a 2005 industry update focused on the previous decade found that US SRI funds grew 4% faster than managed assets in general.

Given their success, it’s not a surprise that these funds have gone mainstream. Today, nearly 10% of all money under professional management in the US is located in SRI funds.

While strictly green funds are a smaller subsection of SRIs, their numbers are growing and it seems to be becoming easier to join the club.

Exxon showing up as the top holding on the several-month-old Claymore LGA Green ETF isn’t a sign the oil giant has made a drastic about face, it has more to do with the shade of the fund.

How dark a green

In the same way environmentalists can be divided into dark and light greens, depending on their degree of radicalism, investment funds are often divided into categories of environmental commitment.

Dark green funds:

  • Apply the strictest screening criteria, usually excluding companies with ties to oil, coal, nuclear power, and detrimental environmental policies.
  • More likely to invest in small or mid-sized companies often with more risk.

Light green funds:

  • Avoid strict negative screening criteria.
  • Commonly use a positive ‘best of sector’ standard to include companies in more traditionally-questionable sectors or those working to improve previously bad environmental records.

Light greens don’t sacrifice profit for convictions

Light green funds allow themselves a much wider scope for selecting companies. Since they’re able to diversify away from the riskier picks like clean energy firms, these funds are much less risky and appeal to the mainstream, but their picks often are too mainstream for traditional environmentalists.

For the managers behind the Claymore LGA Green fund it’s all about the bottom line. With rising energy prices, they believe that eco-friendly firms may have a competitive advantage given that they can reduce energy costs and environmental infraction penalties.

However, they don’t let their convictions get in the way of profit or as they define themselves, “light greens care about the environment, but don’t expect to make big sacrifices of comfort or convenience for it…”

Their motto leaves an open door for what they define as companies with improving performance, but should that include companies that don’t have anywhere to go but to improve?

While Wal-Mart, one of their top ten holdings, has recently tried to clean up their environmental performance, they haven’t made any attempts to improve their infamously bad labor practices and to find much positive in Exxon’s environmental record is a stretch.

In 1989, the Exxon Valdez oil spill served as a rallying point for the socially responsible investment movement and today, they are still far from green. The Sierra Club recently ranked them “bottom of the barrel” on their list of US oil companies, claiming that even 17 years after the spill they still refuse to pay punitive damages and in the past decade, they have been responsible for “hundreds of thousands of gallons of oil spilled in Nigeria and New York.” Add to this record their multi-million dollar investment in research to disprove global warming and it’s difficult to see much improvement.

Sierra Club backs an airline

Even the fund of the environmental group the Sierra Club lowers their standards to make a profit. With a name like the Sierra Club Stock Fund (SCFSX) you’d think they’d be investing in companies fighting climate change, but instead their currrent holdings are made up of companies like pharmaceuticals, banks and even a casino giant (Las Vegas Sands).

They claim to screen out “companies and industries that significantly contribute to the growth of carbon emissions and the resultant climate change”, but Southwest airlines makes it past this filter (and not one train or bike or bus company).

While Southwest is a sponsor of Friends of Trees and recycles all cabin waste, they haven’t changed their basic business model and as an airline they rely 100% on fossil fuels to get off the ground.

The issue here is that Sierra Club’s fund as well as the Claymore LGA Green fund are both using screens to exclude companies with egregious environmental records- however porous might be a screen that would let an Exxon slip past-, but they don’t actively pursue companies trying to change our society’s future carbon footprint.

To go after truly clean companies would assume a much higher risk model and not the consistent returns these more mainstream funds are able to attain.

Dark Green Funds

In 1982 the New Alternatives Fund began operations as the first environmental mutual fund. As opposed to those funds that just screen out environmentally-harmful companies, they “seek to be affirmatively socially responsible” by selecting “companies that produce something that benefits our environment, such as alternative energy, recycling, clean air and water, pollution prevention and conservation.”

They also guarantee that they don’t invest in companies with oil, coal, nuclear power, weapons, tobacco, discriminatory hiring policies, unfair labor practices, detrimental environmental policies or animal testing practices.

The Jupiter Green Investment Trust avoids negative screening and instead invests solely in companies within one of six environmental areas: clean energy, green transport, environmental services, sustainable living, waste management, and water management.

The PowerShares WilderHill Clean Energy fund is another that pursues only actively green companies with picks that “focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.”

The difference is immediately obvious. Not only are oil giants and airlines nowhere to be found, their current top ten holdings include 3 solar firms and a fuel cell company.

Those behind the Winslow Green Growth Fund believe in “small companies with big ideas” and their holdings bear that out. Their two largest investment categories are “green energy” which at over 25% of the fund includes hydro and geothermal firms and “healthy living” which at 17% includes Green Mountain Coffee Roasters and Whole Foods.

The irony is that many of these more actively green funds don’t label themselves as such. While both the Wilderhill and Winslow funds use environmental criteria, Wilderhill doesn’t define itself as green and Winslow doesn’t define itself as socially responsible, which begs the question just who is green?

Who defines socially responsible?

The issue here is that there is no regulatory body for green nor socially responsible funds so it’s up to the individual funds to define themselves. Paul Hawken, founder of the Natural Capital Institute, says that the term SRI has been extended so far that it has lost all meaning.

“Because SRI mutual funds have no common standards, definitions, or codes of practices, many investors express concern and disappointment about their investments. The disappointment does not stem from portfolio losses, but from the lists of companies in the portfolios themselves (Enron, General Electric, Lockheed Martin, McDonald’s, etc).”

While SRI funds remain unregulated in the US, in Europe this is starting to change. This month the Ethical Investment Research Services (Eiris) will launch a ratings service for the estimated £6.1 billion invested in 90 ethical retail funds in the UK.

A broader European standard is currently being developed in order to promote confidence in Corporate Sustainability and Responsibility Research (CSRR) groups.

While the establishment of this SRI research/rating quality standard was motivated partly by the European Commission, the end goal is to “make the standard a fully international one.”

Picking your fund

Until more regulation is in place, investors are forced to judge the greenness of funds on their own. Here are a few tips for getting started.

What to ask yourself:

  • Level of risk: Do you want more large cap companies or are you willing to take risks with a fund focused on smaller, more proactive and usually riskier firms?
  • Blacklisted industries: Are there industries, whether they be oil or even natural gas, that you definitely want to avoid?
  • Targeted industries: Are there industries, whether they be fuel cells and wind power, that you want to support with your investment?

Once you’ve evaluated your personal investment needs, you can begin to analyze the holdings of the different funds. You can work with a broker or do your own online research to review those fundamentals like expense ratios and index compositions.

If you’re still having trouble picking a fund, you might just be sold by a personal touch.

  • The Wilderhill fund uses solar energy in their own offices and have posted a webpage showing just how much energy they are using and the greenhouse gases they’ve avoided.
  • The offices of Portfolio 21 are located in a LEED gold-certified building with on-site composting where where employees can eat on the green roof after carpooling (encouraged by the company) to work.