The Greening of Wall Street.

Stock market investors are slowly beginning to show more interest in environmental questions. It used to be assumed that it was costly for companies to be good environmental stewards. But this view is giving way to new evidence that companies with strong environmental management structures may in fact perform better financially, on average, than companies that are plagued by large environmental liabilities such as the threat of paying costly fines.

A 1995 report by the Investor Responsibility Research Center compared the stock market performance of the companies in the Standard and Poors index, a group of 500 representative stocks. They sorted the firms into "high-" and "low-" polluting companies. Overall, the study found no penalty for investing in "green" portfolios, and concluded that in some cases low-pollution portfolios actually demonstrated superior performance.

A November 1996 study by the consulting firm ICF Kaiser was more bullish still. Its survey of more than 300 Standard and Poors companies revealed that adopting proactive environmental policies had a "significant and favorable impact" on a firm's value in the marketplace, as it reduced the perceived risk of investing in the company, and thus its cost of borrowing money.

As studies like these accumulate, environmentally screened investment funds will likely grow in popularity. A frontrunner is the Global Environment Fund, a private, Washington-based investment fund manager founded in 1989. The fund has raised more than $500 million in investment capital from institutional investors for five investment funds, including two Global Environment Emerging Markets Funds, which now have holdings in some ten countries in Africa, Asia, Eastern Europe, and Latin America. The principal focus of these funds is environmentally related infrastructure, including renewable energy projects and water and sewage treatment plants.

A number of other green investment funds have been established over the last decade, including the Storebrand Scudder Environmental Value Fund in Luxembourg, the Sustainable Performance Group in Switzerland, and the Green Century Balanced Fund in the United States.

In many cases, green investing is part of a broader socially responsible financial strategy. In the United States, socially responsible investing is a growth industry. Investment funds screened according to some social criteria surged from just $162 billion in 1995 to nearly $1.5 trillion in 1999--some 9 percent of all managed funds. The performance of these funds, like all investment funds, varies widely. Overall, however, the returns have been competitive. For instance, the Domini 400 Social, an index of socially screened firms, outperformed the Standard and Poors 500 over much of the 1990s.

Even the venerable Dow Jones index is now getting in on the act. Dow Jones Indexes and the Switzerland-based SAM Sustainability Group launched a new Dow Jones Sustainability Group Index in September 1999 composed of more than 200 "sustainability-driven" companies, which the group defines as those that seek to "achieve their business goals by integrating economic, environmental, and social growth opportunities into their business strategies."

The companies included in the new index represent sixty-eight industries from twenty-two countries, with a collective total market capitalization of more than $4 trillion. The index is currently dominated by European companies in such sectors as automobiles, paper products, food, banks, insurance, and waste management. If it had existed over the past five years, the index would have outperformed conventional indices by more than 5 percent. Financial institutions in Germany, the Netherlands, and Switzerland are already creating investment funds based on the Sustainability Group Index.

In addition to socially screened funds, another $922 billion--more than 5 percent of managed funds--is controlled by activist shareholders who try to influence the policies of the companies in which they own shares by participating in shareholder resolutions and proxy votes, among other techniques. In 1999, concerned investors introduced fifty-four shareholder resolutions related to environmental issues, and some of them have already borne fruit.

In one particularly successful case, Home Depot announced a commitment to purchasing certified timber just three months after 12 percent of its shareholders asked the company to stop selling wood from old-growth forests. The shareholder resolution was one part of a broad campaign by activists to convince the company to take this step.

However, green investors need better information about corporate environmental performance if financial markets are to reflect environmental risks adequately. The last several years have seen an explosion of interest in environmental reporting, but existing efforts have been poorly coordinated, leading to a proliferation of "non-standardized information reported in non-uniform formats," according to the Coalition for Environmentally Responsible Economies (CERES).

In an effort to address this deficiency, CERES launched a Global Reporting Initiative in 1997 in which corporations, nongovernmental organizations, professional accounting firms, and the United Nations Environment Programme are working together to produce a global set of guidelines for corporate sustainability reporting. The goal of the initiative is to elevate environmental reporting to the same plane as financial reporting, making it standard business practice worldwide.

Reforms in financial accounting rules and regulations could help accomplish this. Companies operating in the United States are required to disclose large environmental liabilities, such as hazardous waste sites, on the forms they file with the Securities and Exchange Commission (SEC). But the information varies widely in quality, with many companies submitting vague boilerplate language or no data at all. The reports are particularly sketchy about performance overseas: a 1997 survey by the Investor Responsibility Research Center found that seventy-three out of ninety-seven companies with foreign operations failed to include information about their environmental track records abroad in publicly available documents such as SEC submissions.

The Corporate Sunshine Group--a U.S. alliance of investors, environmental organizations, community groups, and labor unions--is pushing the SEC to do a better job enforcing existing environmental and social disclosure rules, to broaden and deepen these requirements, and to enter into an information-sharing agreement with the U.S. Environmental Protection Agency on companies' environmental liabilities.

Yet, overall, the new rules of the global economy pay little heed to the importance of reversing the ecological impoverishment of the planet. For example, while economists tout record-breaking increases in global commerce in recent decades, the world's leading biologists report that the loss of living species over the same time period represents the largest mass extinction since the dinosaurs were wiped out sixty-five million years ago. The time is now ripe to bridge the mismatch between environmental imperatives and prevailing economic practice if the world is to avoid an unraveling of the natural fabric that underpins life itself.

Hilary French is vice-president for research at the Worldwatch Institute in Washington, D.C., and holds a B.A. in history from Dartmouth College and an M.A. in international relations from the Fletcher School of Law and Diplomacy. This article is adapted from her new book, Vanishing Borders: Protecting the Planet in the Age of Globalization (W. W. Norton and Company, March 2000).