What Is a Green Fund?

A green fund is a mutual fund or another investment vehicle that will only invest in companies that are deemed socially conscious in their business dealings or directly promote environmental responsibility. A green fund can come in the form of a focused investment vehicle for companies engaged in environmentally supportive businesses, such as alternative energy, green transport, water and waste management, and sustainable living.

Key Takeaways

  • Green funds are mutual funds or other types of investment vehicles that only invest in companies that promote socially and environmentally conscious policies and business practices.
  • Examples of environmentally supportive businesses are companies engaged in promoting green transportation, alternative energy, and sustainable living.
  • Green investing began in earnest in the 1990s after environmental disasters like the Exxon Valdez oil spill gained worldwide attention.
  • A variety of mutual funds are available for investors interested in green investing, including the TIAA-CREF Social Choice Equity Fund (TICRX), the Trillium ESG Global Equity Fund (PORTX), and the Green Century Balanced Fund (GCBLX).

Understanding a Green Fund

A green fund's investment strategy can be based on some of the following characteristics:

  • Avoiding negative company criteria (businesses such as guns, alcohol, gambling, pornography, animal testing, etc.)
  • Choosing positive company criteria (environmental programs, energy conservation, fair trade, etc.)
  • A combination of both strategies

Based on performance, it is not yet clear whether green funds and socially responsible investing (SRI) can consistently create better returns for investors, but they do represent a proactive step toward environmental consciousness, which many investors see as valuable.

History of Green Funds

Some have cited green investing as having begun in earnest during the 1990s, a period where investors were more seriously taking into account the harm businesses or the pressure entire industries were putting on the environment. In the wake of headline-grabbing events like the Exxon Valdez oil spill, and large and protracted fights over logging rights in the Pacific Northwest, a set of investors began to view businesses that were better at managing their environmental impact as more valuable than those who couldn't.

These types of businesses, in some investors' eyes, were not only operating in a more ethical manner but had a competitive advantage over companies who were ill-equipped to reduce their impact on the environment. Still, other investors saw an ethical obligation in investing in technologies and businesses that were looking to build a sustainable society through renewable energy sources.

Following the Exxon Valdez oil spill of 1989, Congress passed the Oil Pollution Act (OPA) of 1990, which strengthened the powers of the Environmental Protection Agency (EPA) to prevent future oil spills and to punish polluters.

Types of Green Funds

Some of the sectors where this investment has been taking place include the renewable energy, and buildings and efficiency sectors. The renewable energy sector is a broad one, including solar energy, wind, battery, and energy storage technologies, as well as the materials that help make those technologies possible.

The buildings sector includes builders who use energy-efficient materials, making each building's carbon footprint smaller—whether they're being used for commercial, residential, or office use.

Socially conscious investing has continued to gain in popularity, which is due largely to increased worldwide exposure to the issue of climate change, as well as increased federal funding for alternative energy and other programs. Since 2009, the Green Transition Scoreboard, a project run by Ethical Markets Media, has tracked a cumulative $10.39 trillion invested in the green economy through the end of 2019.

Some of the green mutual funds that are available include the TIAA-CREF Social Choice Equity Fund (TICRX), the Trillium ESG Global Equity Fund (PORTX), and the Green Century Balanced Fund (GCBLX).

Performance of Green Funds

Money has poured into green funds as investors seek both socially responsible investments and returns from the uptick in green technologies such as wind and solar power. Assets under management in the U.S. using sustainable investing strategies rose to $17.1 trillion at the start of 2020, a 42% increase from 2018.

Despite sometimes high fees, the funds have also garnered relatively solid performance. According to Morningstar, sustainable funds in 2019 outperformed conventional funds, with 66% finishing in the top half of their categories and 35% finishing in the top quartile. The returns of only 14% of sustainable funds finished in the bottom quartile. In 2019, the number of sustainable funds grew to 303 open-end and exchange traded funds (ETFs).