SRI and Greenwashing

Socially Responsible Investing is indeed a growing trend as is the environmental movement. In "The Green in Hedge Funds Isn't All About Money" I found a term new to me that describes a phenomenon that I have been suspecting recently - "greenwashing." Here's the idea:

The popularity of the environment and all things "green" has not escaped hedge funds: At least three dozen hedge funds are already applying environmental and social screens to the investment process, with more on the way according to industry reports.

The strategy is to get a piece of the socially responsible investing market, estimated at approximately $2 trillion, according to the Social Investment Forum, specifically the environmental sector, which is growing rapidly.

...hedge funds jumping on board with their specific opportunity lust is sure to buttress more environmental consideration elsewhere in the investment markets, if only for one reason: activity. Hedge funds trade heavily and that activity will surely spawn other investors to seek opportunities in the green sector as well.

This hunt for higher returns, or alpha in investment jargon, may prop up prices even more in environmental stocks, shares of companies that operate in the waste-management or alternative-energy sectors, for example. Activity breeds interest and interest in investing usually brings with it investment dollars. And those dollars usually push up share prices....

"The function of a hedge fund is to create alpha, and anything that gets in the way of that is unwanted," Phillip Goldstein, a manager of Opportunity Partners LP, a hedge fund based in Pleasantville, N.Y., told Investment News. "It sounds like a marketing gimmick, and I don't know that any individuals would invest in something like that."

That marketing gimmick is called "greenwashing" in environmental circles, and it is when a company pays lip service to the environment but doesn't really put into practice anything tangible to back up its environmentally friendly claims.

Home Depot recently offered to include "green" product suppliers in its Eco Options program for customers. Of its 176,000 products, 60,000 product suppliers applied for inclusion. Yet only 2,500 made the official green-label cut. Many were simply rebranding and spinning their existing products "green."

It's the turnout and activity that is interesting. Hedge funds are apparently seeing that too. But they will have to carefully vet their picks to make sure their "green" investments are indeed green and will produce returns of the same color.

So be aware of greenwashing as you will see more and more of the practice in advertising and in investment funds.