This week, Newsweek released its second annual Green Rankings of the largest companies in America, as well as a new analysis of big global corporations. These sorts of cross-industry comparisons of companies are difficult to do, but my sense is that Newsweek has done a credible job, with the help of partners MSCI ESG Research, Trucost and CorporateRegister.com. Given the attention that the list is getting, it seems like a good time to return to a question I've thought about for years: Do companies committed to sustainability represent good investment opportunities?

The stock-market performance of Dell, which tops the 2010 list, is not encouraging: The firm's shares have fallen by 55 percent during the last five years, while the NASDAQ is up by 18 percent during the same time period. Of course, one company's performance over one time period doesn't prove a thing. It turns out that over the past year, the top 100 companies on the 2009 Newsweek list outperformed the S&P500 by 6.8 percent. While this data point doesn't prove anything either, it's interesting. So I arranged an email interview with Cary Krosinsky of Trucost to explore the issue further.

Cary is head of investor and corporate services for North America for Trucost, which is based in the UK. He's also the author and co-editor, with Nick Robins of HSBC, of Sustainable Investing: The Art of Long Term Performance (Earthscan Publications, 2008), and he has taught classes on investing and sustainability at Columbia.

Marc: Cary, let's start by defining "sustainable investing." Is it different from socially responsible investing?

Cary: Socially responsible investing, or SRI, is too broad an investment category. SRI encompasses very different things -- alternative energy investing on the one hand, funds with a religious mandate on the other, as well as funds investing in a mainstream index such as the S&P 500, and subtracting out alcohol, tobacco and firearms. We see many different styles of SRI.

Sustainable Investing is the more positive strand of SRI – one that is future-oriented, risk-adjusted and opportunity-directed. It looks at what companies can do to lessen risk, as well as capitalize on opportunities, in order to be ahead of the curve in their respective industries. It helps create long-term value, identifies "predictable surprises," (as opposed to "black swans,") such as climate change, diminishing water availability, human rights issues and others that influence investment outcomes. Innovation emerges as a key driver of value through sustainability, as does the active management of environmental impacts.

Marc: It sounds like sustainable investing means identifying the smartest, most forward-thinking companies. In your book, you write that "sustainable investing funds have already outperformed consistently over the short, medium and long term." How can you support that claim?

Cary: We found that for the 1, 3 and 5 years leading up to the end of 2007, when looking at SRI funds with this positive, opportunity-focused sustainable investing methodology, that they consistently outperformed their mainstream index equivalents. When updating this study for a UN Principles of Responsible Investment academic paper in 2009, this still held true, both before, through and after the recent financial crisis of 2008 into 2009.

Further correlation of this has been demonstrated by diverse investors including Paul Hawken, who helps manage the Highwater Global Fund as well as Abby Joseph Cohen of Goldman Sachs. Mark Fulton of Deutsche Bank spoke earlier this year regarding how the climate change sectors they are tracking have been outperforming their benchmarks since the recent market bottom. Matthew Kiernan, formerly of Innovest, now runs money and is also demonstrating outperformance from this more positive approach. The top 100 performers in the Newsweek Green Rankings which we actively participate in at Trucost, have outperformed the S&P 500, on an equally weighted basis, by 6.8 percent over the last year.

There appears to be an emerging business case that sustainability drives shareholders value. Our next book for Wiley will focus on how sustainable investors specifically find these opportunities, and how their thinking and methodologies have evolved.

This is in contrast to the first wave of SRI, which used mainly negative approaches. That approach still shapes most SRI assets under management, especially in the US. Those approaches at best meet market performance as many studies have shown. One reason why people believe that you can't make money investing in your values is that these funds are designed to not outperform.

Marc: What do you mean, "designed to not outperform"?

Cary: The largest SRI fund in the US , the CREF Social Choice Equity Fund, has a Beta of 1 by design – in effect, it is designed to meet market performance. And so it doesn't surprise us when such funds match market performance over time.

The first wave of SRI has been backward looking and frankly somewhat fingerpointing. Sustainable Investing, unlike this first wave, is very much forward looking, and can find opportunity where it isn't always expected.

Problems are emerging on a global scale that require innovative solutions, including solving global poverty, and many other issues of inequity. With global regulation, it is the positive opportunities for corporates that emerge as vital and as a result, most investable as well.

Marc: I'm a fan of Paul Hawken , but his critics say he hasn't been completely transparent about his results and methodology. Are any of the other managers you mentioned open about what stocks they are picking and their returns? If so, how are they doing?

Cary: I believe the folks at Highwater would like to be transparent, but they are operating a private fund – I wish a major fund company would have the sense to seize an opportunity to work with Paul, which would remove the transparency issue as well.

A good example of a fund investing this way has been the UK's Jupiter Ecology Fund – a consistent outperformer that finds novel opportunities. For example, over the last difficult 5 years, Jupiter Ecology has returned +34 percent vs. benchmark +26 percent and a sector average fund return of 18 percent. Going back another 5 years, this was the single outperforming fund in its category, so it has a great long-term track record and holds companies for a long time. In fact, for many years its largest two holdings were the same two companies in Vestas Wind Systems, who I'm sure your readers will be familiar with, and Cranswick Plc, a pork producer trying to do things right (which remains the fund's largest holding as of now).

A "Warren Buffett" approach to sustainable investing–make good bets and stick with them–is starting to emerge as an excellent strategy. Even the Yale Endowment has been moving in this direction as its most recent report indicates.

Marc: But there are very few money managers with a track record as good as Buffett's. In fact, there's evidence that the majority of actively managed funds underperform market indexes, especially once their higher costs are taken in account. Why would a fund based on the principles of Sustainable Investing be any different?

Cary: That's an important point. It has been an ongoing challenge for active managers to outperform passive indexes. But we are entering a new paradigm – one where innovation is leading to outperformance as has been demonstrated above, and where macro trends are emerging that the mainstream investment community has yet to pick up on in a serious way.

As a result, the opportunity to invest in a sustainable manner remains, and sticking with legacy indexes may be the riskiest strategy of all. Whether it's peak oil, climate change manifestation, or fresh water shortages, mainstream indexes won't protect you as they are currently configured. You may have lower costs temporarily, but longer term, if you take no action, you will have a very high risk profile.

Marc: I know you'd rather not give investment advice but are there any U.S. mutual funds that you see adopting the principles of Sustainable Investing–or at least coming close?

Cary: That's what we'll be exploring in our next book. At this point, it seems to be early days here in the U.S. for public practitioners of our investment philosophy. With a growing awareness of environmental sustainability, and given the outperformance we've seen, I honestly don't know what the investor world is waiting for.

GreenBiz.com Senior Writer Marc Gunther is a longtime journalist and speaker whose focus is business and sustainability. Marc maintains a blog at MarcGunther.com. You can follow him on Twitter @marcGunther.

_{Photo CC-licensed by Katrina Tuliao.}