There are two broad schools of thought about how people can invest in commodities in an environmentally friendly way. The first, practiced by many SRI fund managers, involves sorting through companies in industries such as mining and oil drilling to find those with the strongest environmental track records among their peers. The second group of investors view metals recyclers and alternative energy producers as the new commodity plays for the 21st century.

The divide will grow more important as more investors seek commodities for their portfolios through stocks, mutual funds and exchange-traded funds. Last year, assets in ETFs following commodity prices rose 105%, according to State Street Global Advisors, and at year's end they held some $67 billion in assets. Even after a year of record commodity investment, institutional investors appear ready to increase their exposure even more in 2010, according to a survey by Barclays Capital. While portfolio diversification is still the reason many investors seek a commodities play, 60% of respondents to the Barclays survey cited absolute return as their motivation for investment. Those investors are likely gearing up for improving economies and higher inflation, which tends to drive commodity prices higher.

For environmentally friendly investors, the question is how to enter a sector that, by its nature, seems environmentally unfriendly. The operations necessary to extract oil from the ocean floor or metal from a deep mine, for example, can cause enormous harm to nature and violate fair labor practices. As Jack Robinson of Winslow Green Growth Fund states flatly, "There is no such thing as clean oil. Either an investment is green, or it's not."

Those in Robinson's camp seek alternatives to traditional commodity investments, including alternative energy and recycling companies, to capitalize on higher commodity prices. Robinson says metal recyclers such as Sims Metal Management, one of his fund's holdings, can benefit from the same inflationary trends that help commodities elsewhere because the prices for the end products rise and fall in the same way. Sims, for example, buys scrap metal from sources such as demolition firms, auto wreckers and manufacturers generating industrial metals. The company then processes those metals for resale to end users such as steel mills and metal brokers.

Winslow also invests in a number of alternative energy companies such as First Solar and Vestas Wind Systems. Robinson believes such companies can act as inflation hedges since alternative energy becomes more desirable as the prices of traditional energy sources increase.

"If credit conditions improve in 2010," he says, "these companies and other innovative green technology firms are poised to benefit from the potential acceleration of new clear energy projects development."

But the connection between green energy and rising commodity prices is not always clear-cut. Alternative energy companies tend to be small and more volatile businesses whose fortunes, and stock prices, hinge heavily on the availability of financing and favorable government regulations. Their stocks tend to march to their own drummer, which is one reason the returns of alternative energy companies and exchange-traded funds often bear little resemblance to those of traditional oil and gas energy investments.

Many people do not view alternative energy companies in the same light as traditional commodity plays, according to Craig Metrick, the head of U.S. responsible investing at Mercer in New York who works mainly with institutional investors such as pension funds and hedge funds.

"The investors we work with tend to see renewable energy as more of a growth or profit play than an inflation hedge," Metrick says. His clients do not necessarily rule out companies in traditional commodity sectors, but they do favor those companies with the best environmental track records among their peers.

Other SRI funds take that moderate stance as well.