The reputation of private equity and hedge funds is that they are all about the money, a stark contrast to the sustainable and socially responsible investing space, which is all about the values. But there are a growing number of alternative investors who think both things are important. 

At the beginning of 2011, $80.9 billion was invested in 375 alternative investment funds incorporating environmental, social and governance (ESG) criteria, up from $69.8 billion in 346 funds the year before, according to a recent report, Sustainability Trends in U.S. Alternative Investments, from US SIF, the Forum for Sustainable and Responsible Investment. 

Of that $80.9 billion, the report identified 233 distinct private equity and venture capital funds with a combined $33.9 billion. Some $44.3 billion was held by 95 property and real estate investment funds. There were also 47 hedge funds identified with a total of $2.6 billion.

Since alternative investment fund managers won't always disclose assets under management, "my hunch is this is a bigger space than we realize," said Joshua Humphreys, the report's lead author and the director of the Center for Social Philanthropy at the Tellus Institute, during a session at the annual SRI in the Rockies conference last fall. 

Nearly three-quarters (73%) of the funds in the study incorporate multiple ESG components into their management strategies. The biggest emphasis is on environmental criteria (represented by $68.9 billion of total assets under management), followed by social mandates ($48.8 billion) and governance criteria ($37.5 billion).

Previous studies also reinforce the idea that the sector is growing and gaining interest, says Meg Voorhes, the deputy director and research director for US SIF. Alternative investments have also gained share in Europe's SRI market, according to research from Eurosif, the European Sustainable Investment Forum.

"Institutional investors have been a large part of the story," says Voorhes, who notes that these institutions have been diversifying more into different asset classes for the past few years and taking their growing interest in ESG with them.

Public pension giant CalPERS has approximately $1.2 billion of exposure to clean technology in its alternative investment management program. The CalPERS Clean Energy and Technology Fund has capital commitments to 14 private equity funds focused on clean tech and energy.

Not surprisingly, however, troubles in the clean energy sector have chased away some investors and funds. The WilderHill New Energy Global Innovation Index (NEX), a commonly used industry benchmark, plummeted 40.2% in 2011.

But alternative investors who remain committed to carbon reduction say they're in it for the long haul, not quick profits. And they share a strong sense of optimism.

Environmental Enthusiasm

"We think tremendous opportunities exist for at least the next couple of decades," says Richard Bookbinder, managing member of New York-based Bookbinder Capital Management LLC and its affiliate TerraVerde Capital Management LLC. The latter manages TerraVerde Capital Partners LP, a fund of funds that invests solely in green hedge funds. 

Bookbinder admits it's gotten very challenging to be invested in this area at a time of global economic slowdown, Washington gridlock and cutbacks in environmental financing by the U.S. and European governments. But capital setbacks notwithstanding, a fast-growing global population will have no choice but to address shortages in energy, food and water, he says. 

"The good news is companies around the globe are really picking up the slack," says Bookbinder. Even without government funding, he expects to see much more entrepreneur activity. What's more, sustainable clean tech is still in its infancy in the U.S., he says.

The TerraVerde fund, launched in 2009, has roughly 20% of its assets in water-related investments, says Bookbinder. Its underlying hedge funds also have exposure to wind and solar power, agriculture, fuel cells, biodiesel fuel and other sectors related to reducing the carbon footprint. 

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