A green fund is a mutual fund that invests solely in companies or industries whose practices reflect environmental conscientiousness or that support conservation efforts. This also means that the fund avoids companies whose actions may harm the environment. The practice of investing in green funds indicates growing interest in socially responsible investing, or choosing companies based on values and business practices, rather than solely on high returns. Investing in green funds does not necessarily bring higher or lower returns than the average mutual fund. It merely guarantees that the investor’s money will be supporting companies that reflect his or hers values.
Traditionally, the primary reason for investing in stocks and mutual funds has been to maximize returns. Investors who choose a green fund over a traditional mutual fund tend to be interested in supporting a company’s ethics, too. Investors in green funds may hope to influence business decisions by sending a message about consumer beliefs and raise awareness of specific global or local concerns. Increasingly, some investors are embracing the concept of green economics, or the belief that because economic decisions impact the environment, financial decisions should be made with the ecosystem in mind.
Green fund managers generally have varying criteria for screening companies. Managers may take an inclusionary approach to choosing green companies and include companies that are directly involved in environmental business, such as natural resource management or developing alternative energies. Other companies are not directly producing a green product or service but take active measures to reduce waste and greenhouse gas emissions. Some may use renewable resources such as solar or wind energy, or take part in many other eco-friendly practices.
Green fund managers will also take an exclusionary screening approach by rejecting companies involved in certain industries, like fossil fuels, or that are generally considered big polluters or harmful to the environment. Some fund managers also exclude companies that do not have a good record with responding to environmental concerns or that remain environmentally neutral.
In response to growing interest in green investing, the Domini 400 Social Index (DSI) was created as a measurement of companies that have been deemed socially and environmentally responsible. The index excludes any companies considered “sinful stock,” or companies whose actions are considered morally or ethically questionable by much of the population. Tracking the DSI index gives investors with a tool that gauges green fund performance against other market indexes.
