Al Gore won the Nobel Peace Prize, the Vatican is going carbon neutral and Australia is phasing out incandescent light bulbs.

So what can you do to help make the world greener? Why not check out mutual funds that specialize in eco-friendly investing. The sector has grown rapidly in the last few years. According to Michael Herbst, an analyst at Morningstar, net assets of the 10 actively managed green mutual funds the firm tracks have increased by 414% over the last three years.

If this kind of approach appeals to you, here are some places to start:

The ( PORTX) Portfolio 21 Fund (PORTX). Like traditional socially responsible funds, this one excludes companies in the nuclear energy, tobacco, gambling or weapons industries, as well as companies with poor records in employee relations, human rights, community involvement and product safety.

Unlike traditional SRI funds, it selects only companies whose business models meet one or more of these criteria:
  • They are designed to succeed under ecological constraints
  • They work toward reducing the ecological impacts of their products or services
  • They invest in the environment
  • They make environmental sustainability a priority
  • They have strong environmental management
  • They use resources efficiently
  • They reduce their greenhouse gas emissions and the risk of toxic spills

The fund recently held about 23% of its assets in U.S. stocks, with the rest divided among shares of established companies in countries ranging from Australia to Finland.

Since its inception in 1999, the Portfolio 21 Fund has outperformed both the S&P 500 and the MSCI World Equity Index. The fund has also outpaced both indices over one-, three- and five-year periods.

The fund's top holdings include Nokia ( NOK), IBM ( IBM), HSBC ( HSB), Novartis ( NVS) and Canon ( CAJ)

Green Century Capital Management offers two environmentally friendly funds. Both avoid companies involved in nuclear weapons and nuclear energy; tobacco; fossil fuel; animal testing for non-medical purposes; factory farming; genetically modified organisms and agricultural pesticides. The funds also favor companies that respond well to shareholder initiatives.

The ( GCBLX) Green Century Balanced Fund (GCBLX) invests about 25% of its assets in bonds and not more than 75% in stocks. This fund invests in companies whose products and services demonstrate a commitment to enhancing and preserving the environment; companies with clean environmental records who disclose their policies and performance on certain environmental criteria; and companies that promote a healthy environment through methods such as renewable energy.

The balanced fund primarily invests in the securities of fast-growing companies, both large and small ones. The bonds in this fund are of varying maturities, and it can allocate up to 35% of the fixed-income section of the portfolio in junk bonds. The fund has trailed the Lipper Balanced Fund Index recently, but outperformed it over the past five years.

The fund's top holdings include Hewlett Packard ( HPQ), Air Products and Chemicals ( APD), Emerson Electric ( EMR) and IBM.

The goal of the ( GCEQX) Green Century Equity Fund (GCEQX) is to achieve a long-term total return that matches the performance of the Domini 400 Social Index. Its holdings are heavily weighted toward large companies. Companies are chosen based on the same criteria that define the Domini 400 Social Index, including waste disposal, toxic emissions, waste and emissions reductions, recycling and the use of environmentally beneficial fuels, products and services.

The fund has gained 12.60% over the past five years, vs. 15.46% for the S&P 500.

The fund's top holdings include Microsoft ( MSFT), AT&T ( T), Procter & Gamble ( PG), Cisco ( CSCO) and Johnson & Johnson ( JNJ ).

( NALFX) New Alternatives Fund (NALFX), formed in 1982, was the first green fund in the U.S. It invests in companies around the world that provide services that improve the environment such as recycling and air and water filtration. New Alternatives also invests in natural foods companies, as well as alternative energy sources, which typically make up at least 25% of their portfolio. As of the end of 2006, this fund outperformed the S&P 500 over one, five and 10 years.

The fund's top holdings include Denmark's Vestas Wind Systems, Norway's Renewable Energy, Spain's Acciona Group, and two German companies, Conergy and Q-Cells.

The PowerShares Wilderhill Clean Energy Portfolio (PBW) is an exchange-traded fund. It invests in companies that focus on green and renewable energy sources and technologies that facilitate clean energy. This fund has outperformed the Nasdaq Composite Index and the S&P 500 since its inception in 2005.

The fund's top holdings include First Solar ( FSLR), SunTech Power ( STP), Sunpower Corp. ( SPWR), Evergreen Solar ( ESLR)and American Superconductor ( AMSC).

Kelsey Abbott is a freelance writer in Freeport, Maine, where she lives with her husband and their dog.

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