There are many shades of green — and there are many varieties of green funds.
There are many shades of green — and there are many varieties of green funds.
And while fund companies are jumping on the environmentally conscious bandwagon, some financial advisers and investors are cautious about whether the funds are really green or some duller hue.
"The best thing you have to do is ask what are the criteria these funds are using," said Peter Wilkes, managing director of Innovest Strategic Value Advisors of New York, a research firm that rates stocks based on socially conscious investing. "You cannot be a passive investor if you want to be in this space."
Investing in green funds requires research, said Steve Schueth, president of First Affirmative Financial Network LLC, an adviser network and research firm based in Colorado Springs, Colo., which manages $700 million in assets and provides due diligence on socially conscious in-vestment portfolios. "Many of these funds have solid fundamentals, but in at least a couple, we have seen — if you looked in-side — it may not be what the investor wants to own," he said.
"I think it's a continuous challenge that we face every day," Mr. Schueth said. "Last year or so, there were a lot of new products launched that appeared out of nowhere; some are pure brainwashing and pure marketing."
First Affirmative has come across "green" funds that include companies involved with gold mining or oil drilling, Mr. Schueth said.
"These tend to have some negative impact on the environment. Those are red flags for us," Mr. Schueth said.
Because there are many different shades of green, investors need to evaluate funds on an individual basis, starting with the prospectus and how the manager defines "green."
"If there was one standard definition of what 'green' is, then a violation of that definition would be easier to figure out," said Michael Herbst, an analyst at Morningstar Inc., which had identified 21 green funds with a total of just $1.69 billion in assets as of June 30.
"There are companies that are known for their screening pro-cesses. Investors should check to see what kind of pedigree and history" the fund companies have, he said.
"What I think is green, my neighbor doesn't. It's very important to read what the fund's criteria are," said Jean Hartman, principal of Greenleaf Financial Group of Los Angeles, which manages $14 million in assets.
"I think the good companies have systems in place to monitor that, but there are always some bad apples," she said.
In order to avoid such problems, some advisers say they invest only with known entities.
"Generally, we stick with big names that we know and trust," said Eileen Burkhart, president of Eileen Burkhart & Co. LLC, a Cleveland fee-based-planning firm. She named companies such as Calvert Group Ltd. of Bethesda, Md., Pax World Funds of Portsmouth, N.H., Portfolio 21 Investments of Portland, Ore., and Winslow Management Co. LLC of Boston, each of which has more than a decade of experience.
'SHORT-TERM HISTORY'
New funds, in particular, can be difficult to judge.
"Many of these funds have a short-term history," said Diane Pearson, a financial adviser with Legend Financial Advisers Inc. of Pittsburgh, which manages $360 million in assets. "We are more concentrated on hiring the manager, and not just the fund."
The funds need a track record, said Michael Gorman, principal of Wiiken & Gorman LLC of Petaluma, Calif., which has $200 million in assets under advisement.
"I would be suspicious of any kind of investment created around the latest new thing," he said.
And investors should expect volatility, though some new funds are focused on climate change and have broad-based holdings in an effort to be less volatile, Mr. Herbst said.
Two of the newer global-climate-change funds include Neuberger Berman Climate Change (NBCLX), from Neuberger Berman Inc. of New York and Pax World Global Green (PGRNX).
"There are some that say green is in the eyes of the beholder, but I think one can distinguish between more sustainable energy and less sustainable energy, between clean technology and polluting technology," said Joe Keefe, president and chief executive of Pax World Funds.
Parent company Pax World Management Corp. knows the consequences of violating a socially conscious fund's investment restrictions. Last month, the firm settled with the Securities and Exchange Commission and paid a $500,000 penalty for actions taken in 2003 and 2004 when former managers purchased securities for two funds that didn't comply with the prospectuses.
The SEC also charged that the firm neglected to screen 8% of securities purchased between 2001 and 2005.
"We are confident in the steps we have taken to upgrade our compliance controls so that mistakes of that nature won't be made in the future," Mr. Keefe said.
PURE PLAY
A discussion about whether its holdings are truly green isn't an issue for Pax World Global Green, he added in an e-mail. "The Global Green fund invests primarily in pure-play companies whose businesses or technologies focus on mitigating the environmental impacts of commerce, including such areas as alternative energy and energy efficiency, water treatment and pollution control, and waste technology and resource management," Mr. Keefe wrote.
Meanwhile, some funds try to avoid the "green" label altogether.
The Climate Change fund launched this year by Neuberger Berman, a unit of Lehman Brothers Asset Management of New York, is based on themes of clean energy, energy efficiency and adaptation but is not a green fund, said Neil Siegel, Lehman managing director and global head of asset management, marketing and product development.
"It's a product designed on an investment thesis, not a social thesis. The thesis is that there would be companies that stand to benefit as they participate in the flows of capital driven by those themes," Mr. Siegel said.
E-mail Sue Asci at sasci@investmentnews.com.
