Since Earth Day 1990, 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.
But the emergence of environmental, or “green,” funds has raised two troublesome questions that socially responsible investors need to 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.
Linda Greer, a scientist with the Natural Resources Defense Council, and an active participant in green funds, suggests investors ask probing questions of fund managers such as:
– Have any companies in a fund portfolio pleaded guilty, or been convicted of violations of health, safety or environmental laws?
– Have any been successfully sued for damages to property or health because of a product or waste they produce?
– Are any exporting products or chemicals that are banned in the United States?
– Do the companies have business plans that include goals for energy conservation or recycling?
” `Green’ is a complicated word,” said Lincoln Pain, chairman of the Bay Area Social Investment Forum. He explained that a portfolio of any green or socially responsible fund is likely to include a company or two with past or present black marks on their environmental record books.
Some funds also make it a point to invest in big, profitable companies with past environmental problems who are making laudable attempts to clean up their acts.
Other funds invest in companies with suspect environmental or social responsibility records just to gain a seat at shareholders’ tables.
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.
“You absolutely must disclose what you mean by socially responsible” to investors, 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.”
Amid the doubts and caveats, the reality is that socially responsible mutual funds have lost a bit of their luster since Earth Day 1990. Why, over the last few years, have green funds slipped?
“When the environmental movement suffers, so do companies that derive revenue from it,” said Kurt Brouwer, partner in the Brouwer & Janachowski advisory firm.
Green funds have been hit by this trend.
“Since (strictly environmental) funds concentrate on only one sector that is very tied to the political process, they tend to be extremely volatile due to a lack of diversification,” said Patrick McVeigh of Franklin Research and Development Corp., in a Business Ethics magazine article.
Still, supporters of conscience-driven investing and managers of green mutual funds are bullish on the future. They note that aside from a terrible 1994, green funds were doing well, compared with investments that don’t screen out polluters.
HOW THE FUNDS HAVE DONE
This is a representative sample of socially responsible funds. Rates of return are as of Sept. 30, 1995, and performance is measured after fees are deducted. The three bold-faced lines are investment benchmarks. %%
Three One Five Social
Fund months year years rating
Calvert SIF Managed Growth 5.0 18.2 10.4 A-
Pax World 5.5 18.0 10.0 B+
Dreyfus Third Century 10.7 28.6 15.2 C-
Parnassus Growth -1.3 17.0 26.4 A-
Calvert World Values World Equity 4.1 3.1 N/A B+
Fidelity Select Environmental 8.4 22.3 6.2 N/A
New Alternatives 3.2 14.1 10.3 B+
Invesco Strategic Environmental 6.1 28.9 N/A N/A
UST Master Environmental 5.9 15.6 N/A N/A
Progressive Environmental 9.9 4.6 1.4 B+
Standard & Poor’s 500 index 7.9 29.7 17.2 N/A
All equity funds 7.8 19.2 17.0 N/A
All environmental funds 6.8 17.1 6.0 N/A
%% N/A–Not available or not applicable. Rating from Franklin Insight Inc. Source: Franklin Insight Inc., Lipper Analytical Services, Morningstar, Investor Responsibility Research Center.
WHERE TO TURN
These independent sources of information about socially responsible investing all publish newsletters.
– Clean Yield Publications (802-533-7178).
– Council on Economic Priorities (212-420-1133).
– Investor Responsibility Research Center (202-833-0700).
– Social Investment Forum (612-333-8338).
