There's a downside to "green" investing

Investors are putting more money into socially responsible mutual funds: assets reached $179 billion in 2006, up fifteenfold from 1995. Much is invested in companies with good environmental records.

But while "green" investing may be good for the conscience, it's not always good for the wallet. Nor does socially conscious investing necessarily lead to changes in corporate behavior the way consumer-product boycotts might.

"Ultimately, it's a question about investing in the kind of future you want to spend your money in," says Ingrid Dyott, co-manager of the Neuberger Berman Socially Responsible fund. "You're betting that the companies that are better environmental stewards will be better companies in the future than those who aren't."

Neuberger and other companies offer mutual funds that use environmental criteria. "There are some that take a best-of-breed approach, finding the best companies financially and applying environmental criteria from there," says Morningstar fund analyst Michael Herbst, noting that this might lead funds to own the greenest players in environmentally unfriendly industries.

"Others will only invest in clean technologies or alternative energy, and then find the best players," Herbst said. Such companies tend to be risky small-company stocks. "It doesn't make sense to invest in a green fund or a company if it's going to lose you money," he says.