What Is Green Investing?
Green investing seeks to support business practices that have a favorable impact on the natural environment. Often grouped with socially responsible investing (SRI) or ESG criteria, green investments focus on companies or projects committed to conserving natural resources, reducing pollution, and implementing other environmentally conscious business practices. Green investments may fit under the umbrella of SRI but are more specific.
Some investors buy green bonds, green ETFs, green index funds, green mutual funds, or hold stock in eco-friendly companies to support green initiatives. While profit is not the only motive, there is evidence that green investing may mimic or beat the returns of more traditional assets.
Key Takeaways
- Green investing refers to investment activities aligned with environmentally friendly business practices and the conservation of natural resources.
- Investors can support green initiatives by purchasing green mutual funds, green index funds, green ETFs, green bonds, or stocks in environmentally friendly companies.
- Pure play green investments are those where most or all revenues are derived from green activities.
- There is evidence that green investing can rival the returns of more traditional assets.
- Investors should conduct thorough research to ensure a company’s commitment to green initiatives.
Embrace Pure Play Green Investments
Pure play green investments derive all or most of their revenues from green business activities. Green investments also might refer to companies with multiple business lines that still focus on green-based initiatives. There are many avenues for businesses to improve the environment, such as renewable energy research or developing eco-friendly materials.
There is no firm definition of “green,” making the qualification of green investments subjective. Some investors seek pure-play options like renewable fuels and energy-saving technology. Others invest in companies with good natural resource management and waste practices but multiple revenue sources.
Top Types of Green Investing
Green Equities
Arguably the simplest form of green investing is to buy stock in companies with strong environmental commitments. Many startups and traditional players focus on low-carbon futures. For example, Tesla has consistently targeted environmentally conscious consumers.
Green Bonds
Green bonds, or climate bonds, are fixed-income securities used to finance projects with positive environmental impacts. In 2021, about $1.1 trillion in new green bonds were issued. These bonds sometimes offer tax incentives, making them an attractive investment.
Green Funds
Investing in mutual funds, ETFs, or index funds providing wider exposure to green companies is another approach. Green funds invest in a variety of promising securities, diversifying across various environmental projects. Examples of green funds include the TIAA-CREF Social Choice Equity Fund, Trillium ESG Global Equity Fund, and Green Century Balanced Fund. Several indexes, such as the NASDAQ Clean Edge Green Energy Index and the MAC Global Solar Energy Index, target renewable energy industries.
Results of Going Green in Investing
Once a niche sector, green investing soared in popularity due to increased attention to climate crises. ESG funds saw over $70 billion in new investments in 2021, marking significant growth. There is evidence that eco-friendly investments can match or outperform traditional assets. Morningstar’s 2022 study reported record performance for environmentally sustainable funds relative to the broader market.
Special Considerations for Green Investing
Investments in green companies might be riskier than traditional equity strategies. Many companies in this area are in the development stage with high valuations and low revenues. Nonetheless, investors prioritizing eco-friendly businesses find green investing appealing. Variing definitions of “green” can complicate investment decisions, so it’s essential to investigate companies or funds closely.
Avoiding Greenwashing
Greenwashing involves making misleading claims about environmental practices to capitalize on the demand for sustainable products. Verification of green credentials can be challenging. Managed funds have attempted to rebrand themselves as more sustainable than they truly are; examining a fund’s assets is crucial.
Select the Best Green Stocks To Buy
Though predicting future earnings is challenging, successful green investments often flourish within the renewable energy sector. Tesla, for example, saw substantial growth in stock value from 2018 to 2021.
Profitability of Green Investments
Green investing proves profitability is achievable. Studies indicate that eco-friendly investments can match or beat traditional asset profits.
Determining Sustainability of Green Funds
To evaluate a green fund’s sustainability, examine its listed securities and check independent evaluations, such as Morningstar’s sustainability rating or State Street’s R-Factor.
Related Terms: ESG criteria, Socially Responsible Investing (SRI), green bonds, green funds, greenwashing, renewable energy, carbon offsets.
References
- Tesla Investor Relations. “Documents and Events: Quarterly Disclosures”, Download 2022; April 20, 2022; Shareholder Deck, Pages 3-5.
- U.S. Department of Energy. “What Are Green Bonds?”
- Climate Bonds Initiative. “Sustainable Debt: Global State of the Market 2021”, Download PDF, Page 5.
- Climate Bonds Initiative. “Tax Incentives for Issuers and Investors”.
- The Eco Alliance. “Green Investing”.
- Nasdaq. “NASDAQ Clean Edge Green Energy”.
- MAC Solar Index. “MAC Global Solar Energy Stock Index”.
- Morningstar. “Sustainable Funds Landscape - Highlights and Observations”.
- Morningstar. “Sustainable Funds U.S. Landscape Report 2021: Another Year of Broken Records”, Pages 1, 25.
- Federal Trade Commission. “Too Good to Be Green: Company’s Plastic Lumber Claims Don’t Hold Up”.
- Earthsight. “Ikea’s House of Horrors”.
- Yahoo! Finance. “Tesla, Inc. (TSLA)”, Select 5Y.
- Yahoo! Finance. “LONGi Green Energy Technology Co., Ltd. (601012.SS)”, Select 5Y.
