Investing Money Where Your Mouth Is

With climate change awareness increasing and oil prices remaining high, demand for Earth-friendlier products and services is growing. And as businesses change their ways, the business of investing in them is, like so many other things, going green.

Values-based investing isn't a new idea, but it has traditionally focused on avoiding the tobacco and weapons industries and companies with poor human rights records. Of every $10 that's professionally managed, $1 goes toward socially responsible investment, according to the Sierra Club.

Investors are increasingly looking to sustainability-minded stocks for both ethical and financial reasons. "It's a way of putting your money where your mouth is," says Rona Fried, editor of the Progressive Investor newsletter and president of SustainableBusiness.com. Plus it can be a smart way to play the market. Alternative energy, for instance, "is going to grow by leaps and bounds in the next five to 10 years," she says.

As with most investing, diversification is key; pouring your life savings into, say, a single algae-biofuel outfit is no wiser than doing the same with an untested dot-com would have been 10 years ago. "In any hot new area, you want to be careful about following the herd and getting caught in a bubble," says Bruce M. Kahn, second vice president of wealth management at Smith Barney and an environmental scientist.

Green mutual funds are one way to spread your assets, but just how Earth-friendly are they? It depends on your point of view. While some funds focus on alternative energy, recycling and pollution remediation, others invest in large companies such as Nokia, Nike, Starbucks and Staples. These companies pledge to reduce their environmental impact -- which, while commendable, isn't necessarily the same thing as not having much of one in the first place.

Some financial professionals argue that investing in large corporations with forward-thinking environmental policies sets an example for their respective industries, and that such actions have tangible ecological benefits. "As companies embark on this path of becoming better sustainability managers, they become more efficient and also uncover new opportunities," Kahn says. "It's like a positive feedback loop."