Green investing is an emerging trend in the investment world. It seeks to support business practices that positively impact the natural environment. In this guide, we will explore what green investing is and how it can be used as a tool for sustainable economic growth.
Green investing is an emerging trend in the investment world. It seeks to support business practices that positively impact the natural environment. Often grouped with socially responsible investing (SRI) or environmental, social, and governance (ESG) criteria, green investments focus on companies or projects committed to conserving natural resources, pollution reduction, or other environmentally-conscious business practices. Green investments may fit under the umbrella of SRI, but they are more specific.
Green investing has become popular over the years, with the overall share of green investments growing from $2.8 billion in 1997 to $5.1 billion in 2009 (Center for Research on Socially Responsible Investment). In the next ten years, it further grew.
The field of green investing is still relatively new, and there are many different opinions as to what criteria ought to apply. For example, some investors would like funds that exclude companies with poor labor practices or those who support certain types of weapons. Others prefer to invest in companies that promote equality regardless of race or ethnicity or work to end child labor.
Some funds are more specific in their attempt to support green practices. Funds with negative screens, for example, exclude companies involved in producing harmful products such as cigarettes, alcohol, weapons, etc. Other funds focus on companies investing in environmental conservation and protection. There is also the field of impact investing, which focuses on companies that empower communities and create opportunities for people in the developing world.
One of the most popular green investment vehicles is socially responsible mutual funds, which allow investors to invest in various businesses while also supporting positive environmental and social impact. Generally, these funds do not have a negative screen, but they may prefer companies with good ESG scores or those that support minority shareholders.
There are many different ways for an investor to support green practices. There is no one solution, as many investors will have differing opinions about what constitutes a green business. As the market continues to grow and evolve, however, more options will be available to those who wish to add green investments into their portfolios.
Green Investing Definition
Green investing is an investment strategy that seeks to benefit the natural environment by using capital to promote business practices with a low environmental impact. In addition, green investments are made in companies that produce environmentally friendly goods and services or provide consumers with more information about their product’s environmental impact.
The Investment Industry Regulatory Organization of Canada (IIROC) defines green investing as “the process of making investment decisions based on environmental considerations.Э At the same time, some sources refer to it as “environmentally conscious investing.”
Green investing is a process of assessing a company’s environmental performance and financial health. It involves looking at a business’s costs, revenues, growth projections, and potential value, as well as the impact it has on the environment. A number of organizations provide environmental ratings or rankings for companies that can help investors make more environmentally friendly investment decisions. In addition, investors can check individual company carbon emissions using databases such as those provided by Carbon Disclosure Project (CDP). Carbon emissions data allows investors to determine how much CO2 each company produces annually and compare this with other similarly sized businesses.
History of Green Investing
Green investing seeks to support business practices that positively impact the natural environment. As concern for the health of our planet has risen, investments in businesses that are good environmental stewards have increased as well.
While green investing began with socially responsible or “socially conscious” mutual funds in the 1970s, it did not take off until the 1990s when both individuals and institutions began recognizing its growth potential, according to Green Investing & Finance News.
The BlackRock Global Allocation Fund was one of the first green funds to be recognized by Wall Street at this time. Other early investors included universities like Harvard and Yale, demanding that their portfolios invest responsibly in light of global warming concerns. Socially conscious fund managers invested in environmentally-friendly companies like solar power developers and recycling companies.
Today, green investing is estimated to be a $6 trillion industry (Malkiel). At the same time, it has become more mainstream as individuals look for ways to express their concerns about both health and environmental issues through their portfolios. Green mutual funds are available on many major financial platforms. Socially responsible investments have become so prevalent that they can even be tracked on popular social media sites, including Twitter. Twitter users who include the stock symbol $NEM in their Tweets automatically get tweets about news items affecting Newmont Mining Corporation, an environmentally friendly mining company in Colorado.
Types of Green Investing
Green investing seeks to support business practices that positively impact the natural environment. Here are the three general categories of green investing:
- Environmentally Responsible Investing (ERI). ERI includes investment in businesses that produce alternative energy, promote recycling and reduced greenhouse gas emissions, or otherwise show an interest in environmental issues.
- Socially Responsible Investing (SRI). SRI is a strategy for individual investors who wish to use their money to improve society by supporting companies with less-than-perfect records regarding environmental or social concerns.
- Area-Based Investments (green real estate, community development/lending, international development). This area is generally less researched and vetted but is beginning to gain traction with investors. Green real estate investing includes portfolios of properties designed for environmental preservation, such as those that help conserve water or fit LEED standards.
Green Investing vs Socially Responsible Investment
Socially responsible investment (SRI) is a form of ethical investing that excludes companies involved in unacceptable business practices. A green investor instead seeks to support businesses that have a positive or neutral impact on the environment. The distinction between these two approaches may seem subtle, but they can yield very different results.
Green investors seek to use their capital to support environmentally friendly business practices. They do this by either purchasing shares of companies that are environmentally friendly or by investing in funds that will give preference to these types of stocks.
Meanwhile, SRI investors will typically shy away from companies involved in controversial areas such as alcohol, gambling, small arms, nuclear power, and tobacco. Green investors have no problem investing in socially irresponsible companies if their environmental policies are strong enough to offset other concerns.
Examples of Green Investing
Examples of green investing are numerous as green investing offers an opportunity for both profit and personal satisfaction.
Climate change is the biggest contemporary challenge facing our planet. While it’s not always easy or quick, companies that effectively integrate environmental practices into their business model are more profitable than those that do not. Thus, saying “green” can be good business. However, “green” comes in many forms. The following are examples of different ways you can go green without sacrificing your bottom line.
- Going solar. Many companies use solar panels to cut their energy costs and neutralize their carbon footprints. Even if you don’t own a business, you can still support this trend by investing in solar energy. You can purchase green energy through your local utility company or a third-party electric service provider. In addition, you may want to consider investing in a renewable energy fund offered by someone like Green Century Capital Management (GCCM). Such funds invest exclusively in companies that produce green energy.
- Buying from green manufacturers. Buying from green manufacturers is another way to go green without sacrificing anything. The definition of a green manufacturer can vary greatly. However, when you buy from a green manufacturer, you know that the product in question was manufactured in an environmentally friendly manner.
- Investing in alternative energy companies. Alternative energy companies are another way to invest in “green” practices. These companies provide products and services that help reduce people’s dependence on fossil fuels, known contributors to climate change. Alternative energy companies have become increasingly popular over the last few years.
Top Opportunities for Green Investing
There are many ways green investing can have a positive impact on the world.
Firstly, green portfolios support renewable energy development. Renewable energy is clean, safe, and productive in many ways. But it is also expensive to develop. Since most renewable energy technologies are not widespread in use, there is not much data to work with. This can make renewable energy appear risky to mainstream investors, who are more likely to invest in “mature” technologies like oil, gas, and coal.
Secondly, green portfolio companies find new uses for recycled materials. The natural resources we depend on for modern living will not last forever. In fact, many of them are already dwindling. Green investors want to make the most use of what we’ve got rather than depleting these resources and requiring companies to find new ways to source materials. That means investing in companies researching and developing, new products and processes from recycled materials.
Finally, green portfolios support cleaner production methods. Many companies that produce products and provide services use hazardous chemicals as part of the process. Over time, these chemicals can accumulate in the environment and become a hazard to public health and safety. Therefore, we need green investors to fund clean production methods.
Advantages and Disadvantages of Green Investments
Let us consider the benefits we can get from green investing as well as the drawbacks of this concept.
Firstly, green investing can lead to improved cash flows through improved operational efficiency. Secondly, it can benefit investors via risk mitigation. Thirdly, it can provide increased financial support for infrastructure spending in key industries such as transportation, renewable energy, and telecommunications. Further, green investing can offer opportunities for increased returns on investment. Besides, it has the potential to reduce technology risk through early access to groundbreaking innovation.
However, there are some other things to consider when going for green investment. Green investing is really expensive, which makes the market less accessible. There is also limited transparency regarding data and methodology in green investing. Furthermore, green investments are still new and subject to uncertainly, including regulatory change. Sometimes, green investments do not yield expected results due to technological limitations or changes in international policy.
Green investing is a growing field. You may think that it’s all about socially responsible investing (SRI) and environmental, social, and governance (ESG) criteria, but green investments are more specific than that. Green investments focus on companies or projects committed to conserving natural resources, pollution reduction, or other environmentally conscious business practices. They can fit under the umbrella of SRI, but they are different from these kinds of investments in some ways, too. For example, green investments tend to be less passive because they often require active involvement with your portfolio company’s management.