EUROPE's burgeoning US $1 billion green fund industry -- half of which is in Britain -- is hard put to keep pace with the sweeping changes in industry. Chemical companies, traditionally the major polluters, are suddenly cleaning up their act and even helping others do so. On the other hand, waste disposal companies, which might seem to be the ideal green investment, may add to environmental problems if they err in their methods.

In August, the share price of German chemicals giant Hoechst ag shot up, helped by the news that it had developed a gizmo for filtering out harmful levels of ozone gas inside buildings and vehicles. Analysts then began asking whether the development of environmentally-friendly products by chemical companies ought to make them acceptable green investments, or whether they should be excluded on grounds that they may still be spewing out harmful effluents elsewhere.

Most green or ecological funds have evolved their own criteria to deal with such thorny questions. At one end of the spectrum is the US $36 million London-based TSB Environmental Investor Fund, which is not averse to investments in chemical companies such as Shell, British Petroleum and Imperial Chemical Industries. They would rather look for a company's propensity to set things right by cleaning up its factories and developing environmentally-friendly products, rather than a flawless environmental track record.

Says Struan Simpson of the London-based Conservation Foundation, which helps green fund managers assess companies, "Most ethical funds tend to avoid the biggest companies. But, in my view, the environmental investor should invest in the larger companies, even if they are chemical companies. They have the funds to back environmental improvement and sponsor health and safety standards."

Not all green funds take such an optimistic attitude. NPI, a London-based life insurance concern that has a green and ethical investments wing, would rather put its money behind a firm that is more proactive on the environment front. The only European chemical company in npi's $20 million Global Care Fund is Kalon Group plc, a manufacturer of solvent-free paints. "It is not sufficient for a company to say that it is moving in the right direction. That does not write off other questions about its environmental record," says Tessa Tennant, chief of green and ethical investments at NPI.

Several funds take a more hardline approach. Says Gary McKenzie, fund manager at the uk-based Clerical Medical Unit Trust Managers, which runs the US $22 million Evergreen fund, "We only invest in companies that have an environmental business -- somehow they have to be cleaning up the environment. We wouldn't invest in a supermarket chain just because it doesn't pollute, unlike some other fund managers who have merely an avoidance policy."

Despite the divergence of views, the direction that such investments take in the future is likely to determine the extent of the greening of global industry.