Green Investing

If you are sensing a change in the whisperings on Wall Street, then you have also realised that green investing is happening. The world is waking up to huge problems. Climate change, social ills and diminishing natural resource. One way investors can help fight these issues is to fund environmental and green initiatives.
The potential for returns for green investing, a nuanced version of environmental, social, and governance (ESG) investing or sustainable investing, is a highly debated issue. Despite this, the issuance of green and social bonds has grown. This has occurred to fund green, social, and sustainable. Debt issuance hit a cumulative $1.1 trillion in 2021, a 57 percent increase from a year earlier. 

What is green investing?

Green investing is a way to support companies and business practices that protect and positively impact the environment. It is associated with socially responsible investing (SRI) and environmental, social, and governance investing (ESG), although it is more nuanced.

Green investments target the protection of natural resources specifically. For example, some companies might produce eco-friendly plastic alternatives, conduct renewable energy research, or find innovative ways to reduce pollution. Green investors buy exchange-traded funds (ETFs), index funds, mutual funds, stock, or bonds. These are ones that represent a vanguard to protect the environment and its natural resources.

The origins of green investing

In the 18th century, various Christian-based religious groups chose to align their investments with their morals and rejected “sin” stocks.  These included stocks linked to slavery, alcohol, tobacco, and gambling. Today, “sin” stocks include sex-related industries, and weapons manufacturers. Later, in the 1960s, SRI gained traction following Vietnam War protests and during the era of Apartheid in South Africa.

According to Investopedia, socially responsible and green investing has received increasing and significant institutional and government support. The United Nations Principles for Responsible Investment (UN PRI) was released with 63 signatories and $6.5 trillion in assets in 2006.

By 2021, the UN PRI had over 3,800 signatories and over 121 trillion in assets. The Global Sustainable Investment Alliance (GSIA) issued its inaugural issue of the Global Sustainable Investment Review in 2012. British Prime Minister David Cameron gave a well-received speech on impact investing in 2013.

In 2021, according to the Climate Bonds Initiative, green, social, and sustainable debt looked to be more than gaining traction. Issuance hit a cumulative $1.1 trillion, a 57 percent increase from a year earlier.

What are the main approaches and aims of green investing?

Green investing supports companies or projects committed to the conservation of natural resources and pollution reduction. Investors buy green bonds, green exchange-traded funds (ETFs), green index funds, or green mutual funds.

They can also hold stock in environmentally friendly companies to support green initiatives. The goal of making a profit is still there. It is just aligned with investors’ desire to have a positive impact on the environment. Here are the main approaches investors use for green investing.

Green equities

The most popular green investing strategy is buying stock in companies that commit to the environment. There are many innovative new startups developing alternative energy, materials, and products. These companies use their green mandates to attract investors through marketing campaigns but talking about it is the easy part. Methods to quantify the real impact that these companies have are lacking.

Green bonds

Green bonds, or climate bonds, act as loans to help banks, companies, and government bodies. Investors buy the bonds, and the funds finance green projects. According to the Climate Bonds Initiative, approximately $1.1 trillion new green bonds were issued in 2021. Added tax incentives help to make these bonds more appealing to investors than traditional bonds.

Green funds

ETFs and mutual funds allow investors to buy into a group of diversified securities and sustainable initiatives. Examples of green mutual funds are:

• • TIAA-CREF Social Choice Equity Fund (TICRX)
  • Trillium ESG Global Equity Fund (PORTX)
  • Green Century Balanced Fund (GCBLX).

Examples of indexes tracking green businesses are:

• NASDAQ Clean Edge Green Energy Index
• MAC Global Solar Energy Index

What is the attraction of green investing?

There are many advantages to green investing. For example, it is a form of infrastructure investing. This is considered less risky as green investments are largely uncorrelated to the markets. There is also increasing political and government support.

Green investing as a form of infrastructure investing

Investing in infrastructure is considered safe with solid returns. This is because it builds real, long-term assets, such as renewable energy and sustainable sewage systems. The cash flow from infrastructure projects is generally stable and predictable.

Projects are often government-funded for decades into the future. Also, unlike private entities like restaurants or service providers, infrastructure assets will not go bankrupt. They also have low marginal costs because infrastructure is so heavily used.

Green investing as an alternative asset

Green investments can be categorized as alternative assets because they aren’t correlated with the markets. Alternative assets, like sustainable infrastructure, have become attractive to investors due to persistent low returns from traditional investments like bonds and stocks. Also, similar to investments in art, luxury watches, or antique cars, the value of the assets is not affected by volatile market movements.

Political and government support

According to EY, many governments have set targets that will promote green investing. For example, countries have committed to achieving net-zero carbon emissions by specified dates. Finland by 2035 and Uruguay by 2030. The United States and China have committed to carbon neutrality by 2050 and 2060, respectively. The EU set targets to cut emissions by 55% by 2030 (from 1990 levels) and to reach climate neutrality by 2050. These institutional commitments and trends will promote green investing.

What are the pros and cons of green investing Vs. Traditional investing?

There are advantages and disadvantages associated with green investing. Most of them are to do with the uncertainty associated with a new market with little data available for technical analysis.

Pros

Performance – Some studies show ESG-focused funds recently performed about as well as the market (or even outperformed non-ESG funds),

Social impact – Traders can have a positive impact while also getting a return

Volatility – By actively engaging in green investing, investors avoid volatility. For example, sustainable energy is less vulnerable to the familiar boom and bust cycles that plague the oil and gas sector.

Cons

Performance – Some studies find that ESG funds will underperform. (any short-term outperformance is attributed to a temporary surge in investor demand for ESG funds, which will eventually recalibrate).

Green bubble – The Economist suggests there could be a “green bubble.”

Fees – Socially responsible investments have 43% higher fees

How can novice investors start green investing?

There are plenty of educational resources available to the novice green investor. For example, books, trade magazines, webinars, podcasts, Youtube videos, blogs, and discussion boards. Take advantage.

Read widely

The more you know about green investing, the better decisions you will make. For example, this is a new, rapidly innovating space, so keeping up to date with trends and technologies will inform your investment strategy. Read annual reports and trade magazines to find the next technological breakthroughs.

Discussion platforms

Engage on discussion platforms and bounce ideas off other investors. One thing to beware of is concept stocks that lack sufficient funding or support to achieve their goals. Also, consider what will happen to early entrants to new green spaces when the big boys show up. According to The New York Times, Shell, BP, and Total are all set to spend billions of dollars developing wind farms to dominate the United Kingdom’s renewable energy market.

You tube and webinars

Be careful with YouTube and online webinars. Research the source to make sure they are credentialed. There are plenty of green gurus, who don’t really know what they are talking about. Seek out other opinions before following their lead.

What green investing funds are there?

The following are popular green investing funds.

Ishares Global Clean Energy ETF

The Ishars Global Energy ETF includes renewable energy companies that tap solar and wind global companies that claim to use clean energy. The fund tracks the investment of the companies in the fund. The fund also screens companies for involvement in areas seen as negative. This includes  “controversial weapons, small arms, military contracting, tobacco, thermal coal, oil sands, shale energy, and arctic oil and gas exploration.”

The L&G Clean Energy UCITS ETF

The L&G Clean Energy ETF tracks the investment and performance of the Solactive Clean Energy Index NTR. The fund focuses on global clean energy and companies that supply key components. Also companies who provide clean energy-related services, manufacture original equipment, and produce clean power.

Companies included in the index must be of sufficient size. Some companies may be excluded if substantial revenues are derived from coal mining, the manufacturing of controversial weapons. Indeed this also includes ones which have breached at least one of the UN Global Compact principles.

Impax Environmental Markets

Impax Environmental Markets Plc (IEM plc) is the largest environmental investment trust in the United Kingdom. The fund focuses on companies that promote clean energy and energy efficiency. This also includes water treatment and pollution control, waste technology and natural resource management, and sustainable food.

Schroder Global Energy Transition Fund

Schroder Global Energy Transition Fund seeks capital growth by investing in companies worldwide engaged in the global transition towards lower carbon energy sources. The Fund is actively managed and invests at least 80% of its assets in companies supporting lower-carbon initiatives.

According to Schroder Global Energy Transition, “the Fund will only invest in companies that generate at least 50% of their revenue from activities contributing to the transition [towards lower carbon sources of energy].”

What are the risks associated with green investing?

Ironically enough, the climate could be the greatest risk to green investing. The success of projects often depends on Mother Nature, and she often has a mind of her own.

The environment may not always co-operate

In 2021, The Guardian reported on two global wind energy companies whose supply chain woes were exacerbated by slower-than-usual winds. Slower winds mean less energy production and less profit. The Danish company, Ørsted, lost 2.5bn Danish kroner (£290m) in the first three quarters of 2021 due to slow winds on the UK’s coasts. Vestas, the world’s largest wind turbine manufacturer, cited supply chain issues and instability on disappointing profits.

Green development does not mean investment profits

The Centre for Climate Change Economics and Policy (CCCEP) 2020 policy report is concerning for investors. It implies that because the goal of green investing is first and foremost to protect the planet, there may not be scope for big corporate profits.

According to the report, firms that diversify into the green market space have higher profit margins than other firms, but not higher profitability. These firms are likely to have lower asset turnover than other firms, likely due to capital investments and higher investment costs. The energy sector is an exception, however. Energy companies show higher profitability and better stock market performance.

Misselling

Another risk of green investing is that your funds may not be invested or applied in the way that you are led to believe. In early 2022, The Financial Times reported on a number of scandals where investment companies were found guilty of misselling their products.

Clients, who believe they are investing in wind and solar companies with high green standards, are actually building a portfolio of bank stocks that happened to have an ESG policy.

Tariq Fancy, former global chief investment officer for sustainable investing at BlackRock Inc., stated that ESG investing “too often boils down to little more than ‘marketing hype’ and ‘disingenuous promises.”

Which brings us conveniently to perhaps the biggest risk to investors where green investing is concerned, “green washing.”

What are the criticisms of green investing?

The criticisms of green investing include funding and the reliability of sustainable energy. But perhaps the biggest threat to investors is green washing.

Green washing

Green washing describes a company that markets its green or ESG activities but fails to support its claims through its operations. The problem has been a lack of rating standards and systems.

There has been an increase in companies that create ratings systems that score companies on green areas like labor practices to water pollution to carbon emissions. However, according to The Economist, there is substantial disagreement among these rating agencies on how ESG and green factors should be weighted and scored.

One of the most recent examples of green washing involves Goldman Sachs’ asset management division and some of its ESG-themed investment funds. According to ESG Today, the U.S. Securities and Exchange Commission (SEC) is investigating Goldman Sachs ESG Emerging Markets Equity Fund, Goldman Sachs International Equity ESG Fund and a US Equity ESG separately-managed account.

Like BYN Mellon one month earlier, Goldman Sachs is accused of misstatements and omissions about  ESG investment decisions in some of its mutual funds. Elsewhere, the CEO of Deutsche Bank’s investment arm DWS recently resigned after police raided the firms’ Frankfurt offices when investigating greenwashing allegations.

Who will fund the investment?

Who should fund green investments, the government or private companies, is an ongoing debate. Governments are strapped for cash due to quantitative easing and lower tax receipts.

Governments are also being criticized because, according to Ulf Erlandsson of the Anthropocine Fixed Income Institute, the quantitative easing efforts by central banks has been financing the “worst carbon offenders out there.” According to a 2020 report by New Economics Foundation, the European Central Bank’s bond buying is “biased towards carbon-intensive companies.”

The truth is that it will take a combination of research institutes, government initiatives, and private sector financing and innovation for the green sector to progress.

Environmental energy is unreliable

As mentioned before, sustainable energy can be unreliable if Mother Nature does not comply with wind, sun, or waves. The conflict between Russia and Ukraine has shown how precarious global energy markets are. Many Western nations turned their backs on coal-fired power stations rendering them dependent on Russian gas and oil and reluctant to boycott these energy sources when Russia invaded Ukraine.

5 tips for profiting from green investing

Here’s five tips to help you profit from green investing. Basically, do your research and due diligence before picking a strategy.

Do your research

It’s understood that green ratings are not standardized and far from perfect. But they at least give a more subjective view of a company or fund’s green mandate. Research as much as you can from independent agencies and don’t rely on the buzzwords used by marketers. The legitimacy of a company’s “greenness” is what will ultimately give your investment value.

Ask questions

You have every right to ask questions if you are considering investing. Find out how your money will be spent, and it’s a good idea to get the information in writing for additional security.

Align your investments with your values

The whole point of being a green investor is to incorporate your values with your investments. If you strongly support alternative energy, invest in solar or wind energy stocks. Trust your instincts and stick with investment strategy that makes sense to you.

Check for fees

High fees will eat into the returns of any investment, and green funds sometimes charge high management fees. Make sure to do your due diligence here. Also, banks and credit unions are increasingly offering savings accounts with green incentives (planting trees as you earn rewards on a credit card for example).

Consider brown companies that go green

Companies that clean up their act are highly influential. For example, oil and gas companies that invest in renewable energy initiatives. These companies garner a lot of attention for “turning away from the dark side.”

Green investing: General terminology

Carbon footprint – The total greenhouse gas (GHG) emissions (carbon dioxide and other GHGs) output for a given company.

Climate change – Changes in global or regional climate patterns, particularly warming because of increased levels of atmospheric carbon dioxide produced by the use of fossil fuels.

Corporate social responsibility (CSR) – Corporate effort to benefit its community and stakeholders through its operations, processes, and philanthropy.

ESG – A factor in sustainable business practices that incorporates environmental concerns social concerns, and governance.

Low carbon – a low carbon footprint from low carbon emissions and no fossil-fuel reserves.

Net-zero carbon – A measured amount of carbon released with an equivalent amount sequestered or offset. A term often used to describe buildings. A net zero carbon building is highly energy efficient.

Paris Agreement – An accord initiated in 2020 within the United Nations Framework Convention on Climate Change. The accord addressed GHG reduction and a global action plan to avoid dangerous climate change by limiting global warming to below 2°C.

Responsible Investing – A philosophy for investing that integrates ESG factors with portfolio construction and maintenance.

Socially Responsible Investing (SRI) – A term that describes ESG investing but integrates exclusionary screening.

Conclusion

Green investing is a way to support companies and business practices that protect and positively impact the environment; specifically, by protecting natural resources. Green investing emerged from the ESG investing trend, but it has become more nuanced in its function.

Critics of green investing cite the lack of regulatory standards that can provide a consistent way to measure the impact of green initiatives by public and private entities. However, SRI is gaining support from governments and institutes worldwide.

According to the World Economic Forum, green investing will become the norm. This is because companies that invest in clean, green businesses will see better returns because of their ability to adapt to the changing world.

FAQs

How can I invest in green energy?

The simplest option to invest in green energy is to find a mutual fund, ETF, or index fund that invests in a wide basket of renewable energy securities.

What are the benefits of green investment?

The benefits of green investment are that some studies show that green investments perform well or better than the market. Also, as an investor, you can align your ESG goals with your investment strategy. Lastly, there is less volatility in green investing, which fundamentally is investing in long-term infrastructure.

Is green investing just another fashion?

Some consider green investing a fad, but this is largely due to the criticism that there are lax regulatory standards. As climate change and ESG issues continue to be at the forefront of political, social, and environment agendas, the impact of green activities will become easier to measure. This will encourage more to engage in “sustainable” assets.

How reliable is green energy?

Geo-political events and climate aside, renewable energy is unlimited and can be created domestically. The four primary modes of renewable energy generation—wind, solar, biomass, and hydro—can meet 100% of the United States’ energy needs.

How does an investor make a return from green investing?

Choosing the right funds and companies. Conduct in-depth research and follow industry trends to develop an investment strategy, and then stick with that strategy. Also, pay attention to how companies measure the impact of their green initiatives to make sure they are not green washing.