Often conflated with socially responsible investing (SRI), green investments are investment activities that focus on companies or projects committed to the conservation of natural resources, the production and discovery of alternative energy sources, the implementation of clean air and water projects, or other environmentally conscious business practices. Green investments may fit under the umbrella of SRI, but they are fundamentally much more specific.
Pure-play green investments are those that derive all or most of their revenues and profits from green activities. Green investments can also be made in companies that have other lines of business but also focus on green-based initiatives or product lines.
The term “green,” despite becoming a nearly ubiquitous one, can be somewhat vague. When people talk about “green investments,” they’re speaking generally of investing in activities that, in a popular context, can be considered good for the environment directly or indirectly.
Some of the options an investor has if they want to build a green portfolio include securities, mutual funds, ETFs, and bonds. Green mutual funds include the TIAA-CREF Social Choice Equity Fund (TICRX); Portfolio 21 Global Equity Fund Class R (PORTX); and the Green Century Balanced Fund (GCBLX). Green bonds can sometimes be offered by governments and generate revenue for funding projects or businesses.
Because individual beliefs on what constitutes a “green investment” vary, what qualifies as a green investment is a bit of a gray area. Some investors want only pure-play options like companies that do research into or make products like renewable fuels and energy-saving technology. Other investors put money behind companies that have good business practices in how they use natural resources and manage waste but also draw their revenue from multiple sources.
Purchasing stock in a business that leads in employing environmentally conscious business practices in a traditionally “ungreen” industry may be considered a green investment for some but not for others. For example, consider an oil company that has the best record for environmental practices. While it is environmentally sound that the company is taking precautions to limit direct damage to the environment, some people may object to purchasing its stock as a green investment because burning fossil fuels is the leading contributor to global warming.
Investing in “green” companies can be riskier than other equity strategies as many companies in this arena are in the development stage, with low revenues and high earnings valuations. However, if encouraging eco-friendly businesses is important to investors, green investing can be an attractive way to put their money to work.
All investors should be wary of companies that simply bill themselves as green for branding purposes without following through with their pledges. Therefore, prospective green investors should research their investments (by checking out a green fund’s prospectus or a stock’s annual filings) to see if an investment includes the types of companies that fit their definition of “green.”