(MONEY Magazine) – BY THE TENS OF THOUSANDS, AMERICANS ARE REFUSING TO COMPROMISE their social and political principles in the quest for investment profits. As a result, so- called socially responsible investing -- in other words, clean and green investing -- is today's fastest-growing money-management style. The pros who invest in companies that, for example, seek to improve the environment or workers' welfare, and shun firms in the tobacco or nuclear-power industries, ^ now manage $625 billion, up from $500 billion last year and a mere $100 billion in 1985. (For 50 top socially responsible investments, see the table on page 133.) Moreover, converts to the clean and green trend are discovering that, contrary to what they have heard from Wall Street types in the past, they can invest for the common good and still beat the average common stocks. That old truism -- that people who restrict their investment choices with socially conscious criteria must resign themselves to giving up at least a percentage point or two of annual profits -- ain't necessarily so. Consider the evidence: -- Of the five ethical mutual funds in existence since 1986, four beat the average returns for their respective fund categories for the five years through 1990 by four to 13 percentage points. The clear winner: Pax World, which topped the average balanced fund, 71.1% to 57.4%, and was the only fund to get an A rating for risk-adjusted return in MONEY's rankings. -- In 1990, when four out of five equity funds in MONEY's rankings posted losses, Pax World was up 10.5%. Two of the other six socially conscious stock funds made money as well: Dreyfus Third Century, up 3.6%, and Calvert Social Investment Managed Growth, up 1.8%. -- And the Domini Social Index, a benchmark of 400 ethical stocks that was created in April 1990 by Kinder Lydenberg Domini, a leading socially conscious investment advisory firm in Cambridge, Mass., gained 19% for the 12 months to April 30, compared with 18% for the S&P 500. It's little wonder the word is spreading that you don't have to sacrifice your principal to your principles -- and that more small investors are welcoming the news. Take Barbara and Russ Widstrand, who own a photography studio in Los Angeles. After long donating money to environmental groups and recycling their trash, they decided to let their consciences guide their investments as well. ''What's the use of donating money to save the whales when your IRA is invested in a company that is killing them?'' asks Barbara, 34. So in late 1988, she and Russ, 32, began moving their $40,000 portfolio to the Calvert Group of mutual funds, which invest only in companies that the funds' managers deem to be environmentally responsible. And the Widstrands have been rewarded. Since they made the switch, they have earned a solid 10.6% to 11.5% on their conservative bond and balanced funds. Moreover, the $4,000 they put in Calvert's aggressive small-company Ariel Appreciation fund has - gained 22% in 12 months.

Never willing to pass up a profit-making opportunity, Wall Street is going green too. Today there are 17 socially conscious mutual funds and other ethical investment products -- among them the top-performing Eco-Logical unit investment trust -- up from six in 1985. In addition, at least eight large brokerages, including Shearson Lehman, Prudential Securities and Smith Barney, now offer research or money-management services that are especially geared to socially responsible investors. Such ethical investing also has spread far beyond the hard core of environmental and political activists. Prodded by demands from the public that they green their portfolios, pension funds now provide more than $500 billion, or 80%, of the money invested according to some sort of socially conscious criteria. For example, TIAA-CREF, the teachers' retirement fund with assets of $90 billion, is pressuring companies it owns to stop doing business in South Africa, as is the New York City pension system, with $45 billion in assets. Despite the growing evidence that socially conscious investing can be profitable, most professionals are still not convinced it will work over the long term -- say, 20 years or more. These pros dismiss the ethical funds' one, or even five, years of solid performance as largely a fluke. ''I don't believe that by restricting your investment universe you can increase your returns -- that doesn't make sense,'' says Chris Niemczewski, president of Marshfield Associates, a money-management firm in Washington, D.C. Adherents of socially conscious investing counter by noting that most practitioners use such broad criteria in picking stocks that some 70% of the 1,000 largest U.S. companies qualify. ''Since typical small investors own at most 25 stocks,'' says Bruce Lehmann, an associate professor of economics and finance at Columbia University's business school, ''limiting the universe to a modest extent won't have much impact on returns.'' Most mainstream clean and green investors start by steering clear of alcohol and gambling stocks, as well as corporations that do business in South Africa, make armaments, produce nuclear power or pollute. Next, the investors subject the remaining stocks to standard financial tests to rule out poor performers and spot promising buys. Finally, they screen the survivors to identify the ones that meet more detailed social criteria. The thinking behind this approach is that doing good pays off. ''Socially responsible management is simply good management,'' says Patrick McVeigh, research director for Franklin Research & Development, a Boston ethical- investing firm. Companies that ignore the environment, say, risk becoming targets of liability suits. Those that follow insensitive personnel policies may have growing difficulty retaining first-rate workers. And firms that consciously contribute to the community can build good will with customers and increase sales. ''By looking at social criteria, we can spot healthy companies and screen out those with problems,'' says Eric McKissack, senior vice president at Ariel Capital, which manages the Calvert-Ariel Growth Fund. The approach has certainly paid off for the fund, which ranks in the top 10% of all small- company growth funds since its inception in November 1986, according to Lipper Analytical Services. Further, the firm's more recent fund, Calvert- Ariel Appreciation, is in the top 15% of all mutual funds for the 12-month period that ended March 31, according to CDA Technologies. Keep in mind, however, that these funds, like all the ethical leaders, are managed according to broad criteria. Other clean-and-green-minded investors follow far stricter rules. For example, some invest solely in companies with at least two women among their directors -- a test passed by just 74 of the firms in the S&P 500. And others who favor stringent bans on animal testing avoid all drug companies and nearly all consumer-products companies. Such inflexibility makes diversification nearly impossible and thereby increases your risk. There is yet another complication: even adherents who follow liberal criteria often disagree on a company's ethical rating. Consider the debate over Amoco, a $28.5 billion natural gas producer and an industry leader in alternative energy research. The company's white hat turned black in 1978 after its tanker Amoco Cadiz spilled 68 million gallons of oil off Brittany. When Calvert fund managers asked investors whether Amoco was still an acceptable stock, it was overwhelmingly rejected. Nonetheless, many other money managers who consider socially conscious criteria continue to hold Amoco shares. As with most investing, the clean and green approach requires careful analysis of a firm's finances as well as its record on social and environmental issues, using data collected from government agencies, private watchdog groups and the company itself. Because such research is too difficult for most individuals, small investors are probably best off sticking with solid, socially conscious mutual funds such as the nine listed in the table on page 133. Check a fund's prospectus, however, to be sure that the manager's goals match your own. Dreyfus Third Century, for example, buys certain defense stocks, whereas Pax World will not hold any. If you want to invest in individual stocks, you will probably need guidance from a money manager or newsletter that is in harmony with your social criteria. For a directory of such experts, send $35 to the Social Investment Forum, 430 First Ave. North, Suite 290, Minneapolis, Minn. 55401. Still, if the Green Spirit moves you, fear not. As long as you don't overdo a good thing, you can invest according to your canons of social responsibility and pick winning stocks and mutual funds. Says Timothy Smith, executive director of the Interfaith Center on Corporate Responsibility, which advises money managers for church and religious organizations: ''If companies pay attention to the social bottom line, it will help them remain profit leaders.'' That could be true for small investors as well.