Find the True Meaning of Green

How to investigate the Earth-friendly claims of companies before you invest

Illustration by David Leonard

The common complaint about “green”stocks and mutual funds is that they’re great for the planet but bad for your investment portfolio. But there’s increasing evidence that investing in environmentally conscious companies can reap rewards.

During the recent economic downturn, investors saw payback on their green portfolio initiatives. According to the Social Investment Forum, about two-thirds of socially responsible mutual funds (also known as “green funds”) in the U.S. outperformed industry benchmarks during last year’s economic downturn. Out of 160 funds, 65% bested their benchmarks across nearly all asset classes. Standouts included 73 large-cap funds, 72.6% of which outperformed the S&P 500 in 2009. On average, large-cap socially responsible funds beat the S&P by 6 percentage points.

Green stocks and mutual funds are no longer laggards in part because consumers are becoming more concerned about the environment and ensuring a “greener” future for coming generations. Recycling, energy conservation, and driving more efficient cars have become major concerns. The growing national interest in conserving resources, creating green jobs, and producing alternatives to petroleum-based energy is giving rise to an investing mania that could someday rival the Internet craze of the late 1990s. Not unlike that era, the broader interest in new technologies is spawning a host of untested, small companies that are hungry for investment dollars. It has also provoked large corporations to trumpet their environmental efforts more loudly in a bid to spark investor interest.

So, how can you be sure that you’re purchasing shares in a company that’s financially viable, or one that’s really “walking the walk” when it comes to being green? It’s a question many investors are asking these days. John Gannon, senior vice president for investor education for the Financial Industry Regulatory Authority (FINRA) in Washington, D.C., says consumers should beware of green energy investment scams, “a hot area of stock scams,” he notes. Companies that claim to be involved in alternative energy are on FINRA’s radar screen, Gannon says. While some do present legitimate investment opportunities, others may simply be scams. The best way to avoid a bad investment? “Steer clear of unsolicited offers for green energy investments,” warns Gannon, “especially if they’re offering rich rewards.”

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