Green Grows On Companies And Investors
“Many people think of green stocks as solar and wind, which would be way too risky and volatile to base a diversified portfolio on — they don’t realize there are leading large cap companies as well as companies across most industry sectors that can provide the basis for a well balanced portfolio,” says Rona Fried, editor and publisher of Progressive Investor, and president of SustainableBusiness.com.

Both strategies can be accomplished by buying individual stocks, mutual funds, or exchange-traded funds—or a combination of all three.

There are also now plenty of stocks for an individual investors to consider. This past fall, Sustainable Business and Nasdaq created a“green economy” indexof 368 global companies, which are also available on the firm’s websitelisted in several categories ranging from “bio from “biomass/biofuels,” to “natural health & supplements.”

“If an investor is comfortable creating and tracking their own portfolio, they would be easily able to create a completely green portfolio that’s nicely diversified across small, medium and large companies and across various industry sectors,” says Fried.

That may be true. But Hal Brill, cofounder of the financial advisory firm Natural Investments, said investors who want to take on building their own green investment portfolio need to make sure they have plenty of time to get to know each company, many of which are small and vulnerable to market swings.

“As a professional who learned some lessons the hard way, unless you’ve got the resources to visit the companies and interview management yourself…it’s really hard in this field,” Brill says.

A better strategy, says Brill, is to invest in mutual funds or exchange traded funds.

There are several green ETFs that invest in baskets of alternative-energy or clean-tech companies. Brill says he uses ETFs, in combination with funds for his green-minded clients.

As with any green fund, investors should make sure the manager is buying companies in sync with their values. Not all water funds are high-minded businesses determined to improve water quality, for instance.

“Just because they are in that space, doesn’t mean they are good,” Brill said.

How to Pick a Green Fund

For those who would rather leave the stock picking to a mutual fund manager, several pure-play funds exist. Investors can find them at Social Investment Forum, a trade organization, and SocialFunds.com by screening the universe of SRI funds for those focused on the environment.

But fund investing has risks too in that green funds have widely different strategies.

“Make sure it’s the type of fund you are looking for,” says David Kathman, senior mutual fund analyst at Morningstar. “As with a (socially responsible investing) fund, you need to look at what the screening criteria are and if they are in line with your values.”

Green funds take two basic approaches — they either narrowly focus on specific sectors, such as Calvert Global Alternative Energy orDWS Climate Change — or they invest in a broad universe of companies considered environmentally friendly. Morningstar calls these “best-in-breed,” funds, because they invest in companies with “industry leading environmental track records.”

Alger Greenand Green Century Equity, for instance, look likeS&P 500 funds, but they focus on companies that consider the environmental implications of their products and business practices. Apple , Microsoft and Wal-Mart were Alger Green’s top holdings as of the end of the second quarter. Microsoft, Procter & Gamble , and Johnson & Johnson were Green Century Equity's top picks.

Among pure green funds, one with a broader strategy is Winslow Green Growth . The fund, one of the oldest in the sector, invests across the green spectrum, but sticks to smaller companies in a range of industries that either make an environmental product or provide a solution to an environmental problem.

The fund is considered one of the best in the category by Morningstar, although Kathman cautions it’s a fund for the “risk-tolerant” as it’s oriented to “small and speculative” companies.

Winslow Green changed its original strategy of using “negative screens” to weed out companies in industries like oil, coal, tobacco and nuclear powers after Whole Foods went public in January 1992, and the firm began to see “green” could be a driving force behind a company’s business strategy, said founder Jack Robinson,

That universe of companies grew from virtually nothing in the early 90s to more than 1,000, many of which have the potential to grow in the double-digits, Robinson said.

Specifically, green building and construction has a potential annual growth rate of 29 percent, according to Winslow while companies in the Smart Grid business can grow by 23 percent annually.

“Growth rates are accelerating, because demand is going up and the cost (of solutions) is going down,” Robinson said.

Some of Winslow’s biggest holdings include First Solar , a solar manufacturer, Bioexx Specialty Proteins , a Canadian oilseed processing company, and American Superconductor , a power technology company working to include renewable energy sources into smart grid electricity systems.

Taking the Corporate Approach

Investors who want to wade into the green arena, but don’t have the stomach for risk may want to consider the big cap approach: investing in corporations that factor the environment into their bottom line.