Green Investing: What It Is, Investing Options, Industries

By Michael Flannelly · June 06, 2024 · 8 minute read

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Green Investing: What It Is, Investing Options, Industries

Green investing is a type of socially responsible investing that focuses on companies with a positive environmental impact. Investors may put money into companies involved in renewable energy, energy efficiency, and clean technology.

Green investing has grown in popularity, as environmental issues have become more top-of-mind for many people. For investors, green investing may offer the chance to invest in companies and endeavors that help them build wealth and support personal values.

What Is Green Investing?

Green investing is an investment strategy that focuses on companies and projects that aim to minimize environmental damage or promote sustainability. Green investing, sometimes referred to as sustainable or eco-investing, tends to consider environmental, social, and corporate governance (ESG) factors in addition to financial return.

However, the definition of green investing can vary depending on the preferences of an investor or institution. As such, it’s also often roped into the same conversations as ESG or sustainable investing.

In general, though, green investing is intended to generate both financial returns and positive environmental impacts. For example, an investor might invest in a company that manufactures solar panels, which would have the dual effect of generating income for the investor and promoting the use of renewable energy.

Pure-Play Green Investments

Pure-play green investments generate a majority of revenues and profits from green business activities. Pure-play green investments focus solely on environmentally friendly or sustainable projects and companies. Some industries that may be considered pure-play green investments are renewable energy, alternative agriculture, and green transportation.

In contrast, some investors prefer a more comprehensive range of green investments, like focusing on companies that operate in other business lines but are transitioning their production to clean energy. These investments could include fossil fuel companies working towards reducing greenhouse gas emissions.

Recommended: How to Invest in Energy Stocks

Green Investing vs Socially Responsible Investing

Green investing focuses on companies that are considered to be environmentally friendly. Socially responsible investing usually focuses on a broader range of companies that are considered to be socially responsible. Socially responsible investments can be in environmentally friendly companies but also focus on promoting ethical labor and other social issues.

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3 Green Investing Options

Investors can make green investments in the stocks and bonds of companies that promote positive environmental values or are involved in green industries. Mutual funds and exchange-traded funds (ETFs) with a sustainable strategy are also potential investment vehicles.

Green Stocks

Buying stocks of companies with environmental commitments can be one way to start green investing. Many firms and startups are involved in green industries, like developing alternative energies and materials, whose shares investors can buy and sell. Some investors believe that companies that focus on green issues are more likely to be sustainable and profitable in the long term.

Investors can also trade stocks of companies that are certified B Corporations, or B Corps, which meet a high, set standard for environmental sustainability in their practices and other metrics like public transparency and social justice. B Corps can be any company, from bakeries to funeral homes, and may or may not be publicly traded.

Green Bonds

The bonds of corporations involved in green and environmentally-friendly business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various projects and business operations.

Additionally, government bonds used to fund green energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them, potentially, a more attractive investment than traditional bonds for some investors. That said, government bonds tend to offer lower yields than corporate bonds, since they’re backed by the U.S. and considered lower risk.

Recommended: How to Buy Bonds: A Guide for Beginners

Green Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds that provide exposure to green companies and investments. There are a growing number of index funds that invest in a basket of sustainable stocks and bonds. These funds allow investors to diversify their holdings by investing in one security.

Recommended: How to Trade ETFs: A Guide for Retail Investors

Green Industries to Consider for Investment Opportunities

There are numerous industries or areas that prospective green investors can look into, including renewable energy and transportation.

Renewable Energy

Renewable energy is a broad category that can include companies creating solar panels, wind turbines, and more. There are many publicly traded companies operating in the renewable energy space as well, in addition to larger companies that have renewable energy subsidiaries or divisions.

Examples include:

•   First Solar (FSLR)

•   NextEra Energy (NEE)

•   Brookfield Renewable (BEP)

•   Constellation Energy Corp. (CEG)

•   Plug Power (PLUG)

Transportation

Green or clean transportation is another area in which green investors can dip their toes. The sector largely includes electric vehicles, or other green methods of transportation.

Examples include:

•   Tesla (TSLA)

•   Rivian (RIVN)

•   Nio (NIO)

•   Ford Motor Company (F)

•   Lucid (LCID)

Pollution Control

Pollution control companies are more or less what they sound like, and find ways to devise or engineer clean-up solutions. Again, these companies can fit in a variety of buckets, oftentimes, but do allow green investors access to a different market segment.

Examples include:

•   Tetra Tech (TTEK)

•   Montrose Environmental Group (MEG)

•   CECO Environmental Corp. (CECO)

•   Fuel Tech Inc (FTEK)

•   Energy Recovery Inc. (ERII)

Waste Reduction

Waste reduction stocks also have a wide berth, and can include companies in the waste management business, among other adjacent industries.

Examples include:

•   Waste Management (WM)

•   Clean Harbors (CLH)

•   Casella Waste Systems (CWST)

•   Stericycle (SRCL)

•   Republic Services (RSG)

Water Management

Water management is another important element in environmental conservation, and there are numerous companies that operate in the segment, and funds that cater to investors.

Examples include:

•   American Water Works Co. Inc. (AWK)

•   IQ Clean Oceans ETF (OCEN)

•   Global X Clean Water ETF (AQWA)

•   Fidelity Water Sustainability (FLOWX)

•   Invesco S&P Global Water ETF (CGW)

Sustainable Agriculture

Sustainable agriculture involves utilizing specific strategies to farm in environmentally friendly or conscious ways. There are stocks and funds that investors can check out, too.

Examples include:

•   Bunge Global (BG)

•   John Deere (DE)

•   Mosaic (MOS)

•   Nutrien (NTR)

•   Global X AgTech & Food Innovation ETF (KROP)

Benefits and Risks of Green Investing

Green investing is a strategy that investors can use to try and generate returns. However, there are no guarantees, and there are benefits and risks to the strategy to consider.

Benefits of Green Investing

There are several reasons why investors might choose to invest in green businesses. Some investors think that companies with strong sustainability practices will outperform those without them over the long term, believing that companies with good sustainability scores may have better employee retention and lower capital costs as they benefit from efficiencies, such as by using less energy or going paperless.

Other investors believe that green investing aligns their values with their investment portfolio. For example, an investor concerned about climate change may choose to invest in companies working to develop clean energy solutions.

Risks of Green Investing

Companies that are leaders in their industries regarding environmentally friendly business practices may be growth companies and startups. As such, the stocks of these companies may be more volatile than others.

In addition, some companies may make false or misleading claims about their sustainability practices to appeal to green investors. This is known as greenwashing.

Finally, even companies with strong sustainability practices can negatively impact the environment. For example, a company that manufactures solar panels may use harmful chemicals in the production process.

Performance History of Green Investing

Green investing may be profitable, depending on the definition of green investing, the time frame considered, and the specific type of “green” asset.

For instance, during 2023, sustainable equity funds saw median returns of nearly 16.7%, which was better than traditional equity funds for that year, which saw median returns of 14.4%. Other data, on a broader time scale, though, shows that sustainable funds over three and five years trail traditional funds – so, again, it depends on the specifics of what you’re looking at.

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The Takeaway

Green investing involves investing in companies operating in environmentally-friendly industries, such as renewable energy, energy efficiency, and clean technology. Adhering to a green investment strategy may be a good way to align personal values and financial goals, but there are a few things to consider before you get started. First, it is important to research and invest in companies you believe in; you want to consider their financial stability, environmental impact, and overall business practices.

Additionally, it’s important to keep long-term goals in mind; green investments may not always be the most profitable in the short term, but they can provide long-term benefits. And like any investment strategy, it’s crucial to diversify your portfolio to minimize risk.

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FAQ

What is meant by green investments?

Green investments may be assets tied to or associated with companies operating in industries like renewable energy, electric vehicles, or sustainable agriculture. Green investments align with environmentally-conscious goals.

Are green investments profitable?

Green investments may be profitable under certain conditions, but there’s no guarantee that any specific green investment or asset will generate a positive return.

How do I start green investing?

There are numerous ways to get started with green investing, which can involve buying green stocks, bonds, or funds.

How do green funds work?

Green funds work like other types of funds, in that they’re pools of investors’ money directed at investing in green or sustainable companies. These types of funds may take the form of ETFs or mutual funds.


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