Green investments are traditional investment vehicles (such as stocks, exchange-traded funds and mutual funds) in which the underlying business(es) are somehow involved in operations aimed at improving the environment. This can range from companies that are developing alternative energy technology to companies that have the best environmental practices. For the stock savvy, there are many pure-play, leading edge green companies that are traded on the major stock exchanges. These include startups that are developing new methods for creating biofuels or solar panels, and traditional market cap heavyweights that are expanding their product lines to include environmentally friendly products (such as General Electric's development of wind-powered electric generators). (To learn more, read Go Green With Socially Responsible Investing.)

Green investing can also be achieved through exchange-traded funds (ETFs), which mimic the stock indexes made up of green companies. Mutual funds can be another alternative, in which case a professional portfolio manager makes the green asset allocation decisions based on the fund's prospectus.

Unfortunately, because individual beliefs on what constitutes a "green investment" vary, exactly what qualifies as a green investment is a bit of a gray area. Purchasing stock in a business that is an industry leader in terms of employing environmentally conscious businesses practices in a traditionally "ungreen" industry may be considered a green investment for some, but not for others. For example, consider an oil company that has the best record for environmental practices. While it is environmentally sound that the company is making the best precautions in preventing any direct damage to the environment through its day-to-day operations of drilling for oil, some people may object to purchasing its stock as a green investment, because burning fossil fuels is the leading contributor of global warming.

Therefore, prospective green investors should research their investments (by checking out a green fund's prospectus or a stock's annual filings) to see if an investment includes the types of companies that fit their personal definition of "green".

There isn't a huge difference between socially responsible investing (SRI) and green investing; green investing is actually a form of socially responsible investing. Both of these terms refer to investment philosophies that are backed by ethical guidelines that help to steer the investment selection process. The biggest difference between the two is the overall scope of the investment philosophies' focus: green investing is more narrow in its focus when compared to socially responsible investing.

Green investing is mainly focused on investing in companies and technologies that are deemed to be good for the environment. This includes individual companies that have a solid track record of reducing the environmental impact of their operations, as well as companies that offer alternative energy technologies such as solar and wind power. Green investors will also avoid investing in companies that have a negative impact on the environment, such as companies with poor emissions standards.

Socially responsible investing is broader in its focus in that it considers companies that create a social and environmental benefit, and avoids companies that have a negative effect on society. Companies with a strong record of charitable contributions, that provide a fair and diverse workplace, and/or that have a minimal impact on the environment are just a few examples of social responsibility. A major part of socially responsible investing is the exclusion of certain industries that are deemed to have a negative impact on society, including those involved in alcohol, tobacco and defense.

Clean technology, commonly referred to as cleantech, is a term used to describe environmentally friendly technologies that work to improve a company's operations, performance, productivity and efficiency while lowering their costs, energy consumption, inputs, waste or pollution.

Cleantech includes six types of industries: 
1. Energy
2. Water and waste water
3. Advanced materials
4. Energy efficiency and manufacturing
5. Transportation
6. Agriculture

Energy is the largest of the six. The clean energy that is available to companies includes solar power, wind power, hydro power, biofuels and geothermal energy.

Cleantech stocks are stocks issued by companies that are using cleantech to reduce costs and become more efficient. Investing in cleantech stocks doesn't mean investors will suffer lower returns. Consider First Trust Portfolios LP's Nasdaq® Clean Edge® U.S. Liquid Series Index Fund (QCLN), which uses the Nasdaq® Clean Edge® U.S. Liquid Series Index as a benchmark. Since the fund opened on February 8, 2007, net asset value and market price performance were 25.5% and 25.35% respectively (as of September 28, 2007).

The carbon trade came about in response to the Kyoto Protocol. Signed in Kyoto, Japan, by some 180 countries in December 1997, the Kyoto Protocol calls for 38 industrialized countries to reduce their greenhouse gas emissions between the years 2008 to 2012 to levels that are 5.2% lower than those of 1990.

Carbon is an element stored in fossil fuels such as coal and oil. When these fuels are burned, carbon dioxide is released and acts as what we term a "greenhouse gas".

The idea behind carbon trading is quite similar to the trading of securities or commodities in a marketplace. Carbon would be given an economic value, allowing people, companies or nations to trade it. If a nation bought carbon, it would be buying the rights to burn it, and a nation selling carbon would be giving up its rights to burn it. The value of the carbon would be based on the ability of the country owning the carbon to store it or to prevent it from being released into the atmosphere. (The better you are at storing it, the more you can charge for it.)

A market would be created to facilitate the buying and selling of the rights to emit greenhouse gases. The industrialized nations for which reducing emissions is a daunting task could buy the emission rights from another nation whose industries do not produce as much of these gases. The market for carbon is possible because the goal of the Kyoto Protocol is to reduce emissions as a collective.

On the one hand, carbon trading seems like a win-win situation: greenhouse gas emissions may be reduced while some countries reap economic benefit. On the other hand, critics of the idea suspect that some countries will exploit the trading system and the consequences will be negative. While carbon trading may have its merits, debate over this type of market is inevitable, since it involves finding a compromise between profit, equality and ecological concerns.

In the financial world, where profit and return are often the priorities of the average investor, the vehicles we use to reach our monetary goals can be overlooked. We know that mutual funds are able to offer instant diversification to individual investors; they give investors access both to different parts of a nation's economy and to the global marketplace. But another, perhaps buried, concern is the idea of socially responsible investing. While investing in a big name arms manufacturer may produce a tidy return in a person's portfolio, it can be disturbing to learn that the weapons being manufactured eventually become a payload in some foreign country.

By not investing in stocks that do business in areas such as gambling and the manufacturing of weapons, tobacco, drugs and alcohol products, individuals can impose their own social and moral values on their portfolios. Furthermore, people can choose to invest in companies they believe are making valuable social and environmental contributions, such as educational companies or companies that make an effort to curb pollution and protect the environment.

Of course, people will have different ideas as to what is socially responsible, ethical or even moral. If investors choose securities in accordance with their own beliefs, it's up to them to choose the investments they consider appropriate. By deciding to invest in companies that are socially responsible and accountable, investors can not only realize financial gain, they can also feel they have contributed to a worthy cause.

As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments. Securities from companies that adhere to social, moral, religious and/or environmental beliefs are a few examples.

In addition to basic quantitative analysis, a socially responsible portfolio manager takes into account a company's community investment, environmental responsibility, protection of human rights, employment diversity, animal testing and product offering. Companies that produce weapons, gambling facilities, alcohol and tobacco are also often excluded. Because individuals have varying values, beliefs and investment goals, there are a number of different types of socially responsible mutual funds available. Some might include only equities or bonds, while others might hold a combination of the two. Furthermore, some funds might specialize in being free of securities from alcohol, casino and tobacco companies, while others might invest exclusively in companies that are environmentally responsible.

Securities that have been screened for socially responsible criteria are then combined to achieve a specific investing style and goal. A portfolio manager will decide whether the fund will be made up of:
7. equity, fixed income or both (balanced)
8. domestic or international securities
9. small, mid, or large cap stocks

How does the performance of socially responsible mutual funds measure up to that of a regular portfolio? On average, their performance has been comparable to that of regular mutual funds. According to KLD Indexes, the Domini 400 Social Index YTD return as of September 30, 2007 was 7.19%, compared to the S&P 500 return of 9.13%