Making some green from 'green' funds

Mutual funds

January 07, 1996|By KNIGHT-RIDDER

Since Earth Day 1990 -- when activists and politicians meeting in Brazil made headlines by launching new initiatives to save the planet -- progressive investors have carved out an increasingly popular niche in the exploding mutual funds marketplace.

Today, at least 40 of the more than 4,000 mutual funds are considered socially responsible and test companies' environmental records, according to Franklin Insight, a Boston-based research firm that tracks such funds. Five actually call themselves environmental or "green" funds, saying they avoid defense contractors and nuclear power companies, and tout investments in companies dedicated to such ventures as alternative energy, environmental damage repair or recycling.

But the emergence of green funds has raised troublesome questions would-be socially responsible investors must consider: Just how green are these green funds? And do they make money?

The answers seem to boil down to two key points: It is very hard -- almost impossible, analysts say -- to create a truly green fund because most conventional companies are bound to have environmental spots on their records or are involved in environmental businesses that have yet to yield a profit. And the more exclusive a mutual fund is, the more it goes against the investment mantra of "portfolio diversity," and the less likely it is to make competitive returns for investors.

So how can you make money in socially responsible investments?

You need to:

* Carefully scrutinize a mutual fund's portfolio.

* Ask a lot of questions about environmental records of the companies the fund supports.

* Be willing to accept lower yields on investments in return for funding pristine companies and upstart environmental firms. Or, be willing to accept investments in companies that demonstrate good financial growth but might not meet everyone's standards of environmental compliance.

Some funds make it a point to invest in big, profitable companies with past environmental problems who are making laudable attempts to clean up their acts. Others invest heavily in companies -- or securities -- that have little to do with the environment, such as "hedge funds" or "short positions" -- investments that are little more than bets on a commodity or stock's future performance.

One of the most controversial recent investments by a green fund was New Alternatives' stake in Browning-Ferris Industries. The fast-growing New Alternatives, which has drawn good ratings from Franklin's Insight and other green-fund monitors, dumped its BFI position after getting pressure from environmentalists and fund investors. BFI has a history of environmental troubles, marked by its once owning US Ecology Corp., the lead contractor in a proposed nuclear waste dump.

New Alternatives still holds a position in Emerson Electric, which has been implicated in one Superfund cleanup site by federal regulators, and which until recently owned a defense-contracting subsidiary.

Fund manager David Schoenwald would not discuss his fund's investment practices. In the past, however, he's said he monitors environmental newsletters and trade and general news reports about alternative energy and recycling companies. He also examines companies' annual reports and then grills executives about their records and products.

Mr. Schoenwald, like other fund managers, said there are often responsible strategies behind investments in companies with spotty environmental records. He argued that some companies are doing things for the environment that are being ignored by activists, simply because the company might have bad marks in its past.

There are fund managers who believe companies that pollute should be rewarded with investments for improving their environmental records.

The Laidlaw Covenant Fund has made such rewards a key in its investment criteria. Laidlaw's index of 200 socially responsible companies rates them strictly on the positive steps they take for employees, the community and the environment, while generally disregarding the negatives.

Other funds invest in companies with suspect environmental or social responsibility records just to gain a seat at shareholders' tables. The Green Century fund, for example, holds stakes in companies such as Pepsico, which has opposed bottle-recycling bills in some communities. Green Century uses such investments to push for change within those companies, filing shareholder initiatives and protests of some activities.

But funds that think they can fuel significant corporate changes probably are deluding themselves and their investors, said Jerry Dodson, manager of the Parnassus group of socially responsible funds -- one of the most successful fund groups and among the highest-rated for its ethics.

The Parnassus group has grown at a clip of roughly 25 percent per year and now stands at almost $275 million in total assets, with an average annual return of 15 percent over the past 10 years.

"You absolutely must disclose what you mean by socially responsible" to investors, Mr. Dodson said. "Some people tend to overstate the impact of these funds. I do think we have an impact, but if you ask if we are going to change a company with a bad environmental record or a bad social record, I'd have to say I don't think so."

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