"It is still a niche market (in Germany), but interest is starting to rise," said Christian Zimmermann of Pioneer Investments, one of the largest fund managers in Germany.

Unlike major players such as Britain, Germany makes up just 0.2 percent of the fast-growing global market in socially responsible investment (SRI), which has expanded by about a third to US$3.6 trillion since 2003, according to the European Social Investment Forum.

"Germany's positive green attitude grew in the 70s and 80s but no-one invested money then with the style that they can do today," said Philipp Spitz, who manages the small environment fund Umwelt Aktiendepot.

The volume of German socially-conscious mutual funds more than doubled to over 1.7 billion euros (US$2.23 billion) from 2002 to 2005, the Forum Nachhaltige Geldanlagen, an industry association, said in a recent study.

Investments in German mutual funds overall grew 43 percent in the same period, the Forum said.

"For investors this is an interesting time as they can do something good for the environment while also benefiting from a sector with high return rates," said Kai Stefani of Allianz Dresdner Global Investors, another top German fund manager.

Several German environmental funds -- which include churches, NGOs and foundations -- say they offer return rates that match or even beat the performance of classic German equity funds.

REWARD

Medium-sized player Invesco's Umwelt und Nachhaltigkeits Fonds has increased its worth by 15.9 percent on average annually over the past three years, industry data show.

The Umwelt Aktiendepot fund, which has invested in companies ranging from renewable energy firms to organic food producers since 1999, says its German fund has had an average annual return rate of around 17 percent since then.

In 2006, it says its German fund increased in value by about 55 percent, more than double the performance of the German and European equity markets.

The value of German equity funds investing mainly in classic domestic names such as BMW or Siemens increased on average by 6.8 percent annually over the last five years and 17.7 percent annually over the last three years, fund industry association BVI said.

RISK

Some green funds focus their investments entirely on companies in sustainable sectors such as renewable energy and water technology, while others prefer to balance their portfolio with companies from other sectors such as media and financials.

A recent rally by some "green" shares such as biofuel and solar firms and a lack of industry standards for these enviromental funds make such investments risky, analysts say.

And some environmental shares such as solar or biofuel stocks have outperformed the broader market but have been sold by many investors who believe they are now too expensive.

Solar cell maker Solarworld is valued at 25.26 times estimated 2007 earnings, and biofuel maker Verbio at 14.84 times, according to Reuters data, while oil major BP is valued at just 9.5 times estimated 2007 earnings.

"We try to invest broadly rather than just in young environment technology ... as otherwise that makes the risk profile of the fund much higher," said Zimmermann, who manages Pioneer Investments' Activest EcoTech C fund.

Umwelt Aktiendepot, which focuses its roughly 5 million euros of investments in a German and global fund largely on firms from sustainable sectors, including Schmack Biogas and wind turbine maker Repower, sees the market's potential far outweighing its risks.