Environmental problems can result in many investors shunning oil and coal stocks in favor of companies involved with solar energy and biofuels. But those cleaner, promising alternatives can have a dark side.

At a session Monday at the SRI in the Rockies conference in New Orleans, three panelists discussed challenges facing the solar and biofuels industries and what investors should know when choosing companies in which to invest. Financial advisors, investors, fund managers and others from around the world interested in sustainable investing attend the conference, produced by First Affirmative Financial Network.

One panelist, Tom Dieppe, who manages sustainability funds for Henderson Global Investors in the U.K., noted solar-panel manufacturing can pollute the environment if precautions aren't taken. He cited a case that was headlined in The Washington Post involving Suntech, one of the top 10 manufacturers of solar cells in the world. The paper reported in March 2008 that one of Suntech's key Chinese suppliers was discharging silicon tetrachloride--a toxic waste from the production of polysilicon that's used in photovoltaic panels--that was believed to be threatening the health of children who lived in the vicinity. Once the news was out, the price of Suntech shares dropped 12 percent, Dieppe said.

"It's a big reputational risk," Dieppe said. "This is meant to be a clean industry. Actually what was happening was that they were polluting somewhere in the supply chain, and what is the point of having cleaner energy if that's what you're doing? You're not helping the environment at all. If we're going to invest in clean energy, it's really got to be cleaner."

Henderson contacted Suntech and held meetings with them over several months. "We said to them, listen you've got to audit your suppliers, you've got to get them to agree to not breach environmental regulations," Dieppe said. "You've got to check out what they're doing and you've got to stop letting people supply you who pollute the environment in this kind of way."

He added that Suntech told Henderson it was the only investment firm that had engaged with them in such detail, with specific suggestions of what they should do. Suntech did end up stopping the supplier from polluting and did set up systems for other suppliers that included getting them to sign contracts saying they wouldn't dump toxic chemicals, Deippe noted.

After that, Henderson expanded its work and developed a survey for solar-panel manufacturers that evaluates how their activities affect the environment, what chemicals they use and how they treat their workers, among other things. Boston Common Asset Management, Pax World and Walden Asset Management also joined the effort. As a result of that survey, the groups produced a solar scorecard, www.solarscorecard.com, which ranks the top ten photovoltaic panel makers on environmental and social factors.

In 2011, the top three PV panel manufacturers in the ranking were Canadian Solar, First Solar and Hanwa Solar One. Dieppe said that Henderson welcomes other investment or advisory firms to get involved with the survey.

Another panelist, Carl Zichella, director for western transmission for the Natural Resources Defense Council (NRDC), said one of the biggest challenges facing the solar industry is finding locations for large-scale solar projects. Minimizing environmental impacts and finding sites that are large enough can be difficult, but not impossible.

One positive project underway, he said, is the solar installation near Harper Dry Lake in the Mojave Desert in southern California that will generate 160 megawatts of electricity. That's enough juice to provide power for 32,000 homes and use 936,000 mirrors. That project is small compared with what will come in the future. For example, Zichella noted, the Blythe solar project in Riverside County, California, will generate 1,000 megawatts of electricity, or enough power for as many 300,000 homes when it's completed.

"Business as usual isn't an option," Zichella said. "The impacts from carbon dioxide pollution are affecting us in all kinds of ways and there is no perfect solution to this. There is no such thing as an impact-free energy source. However, it's still renewable energy and you're not destroying mountaintops to create it."