Green investing is a growing area of opportunity for interested investors. The most well-known green tech sectors and green stocks include renewable energy and electric vehicles, but green investment can apply to nearly every industry.
Investing in green stocks includes buying shares in companies engaged in removing CO2 from the atmosphere; producing food with less water and fewer chemical byproducts; and even those collecting data about climate and emissions or using blockchain technology to make supply chains more efficient.
When looking for green tech stocks to invest in, it’s important to look out for greenwashing, and seek out companies truly doing productive work to decarbonize their industry or create new green products and solutions. The good news is that some research suggests that investing sustainably may also be good for your portfolio.
What Are Green Investments?
Green technology, also referred to as green tech, clean technology, or cleantech, is all about resource management. It includes technologies aimed at producing renewable energy, reducing the production of greenhouse gases, reducing and managing waste, protecting and restoring planetary resources.
Broader than green technology is ESG investing, short for investments with a positive environmental, social, and governance focus. Socially responsible investing includes the treatment of workers and communities, not just the environment.
Why Does Sustainable Investing Matter?
Currently, humanity consumes resources much faster than the earth can regenerate them. By definition, that is unsustainable. As the population continues to grow and nations develop, resource management will only become more critical.
To put our over-use of resources in context: Earth Overshoot Day marks the day each year when humanity uses approximately all the biological resources that the earth is able to regenerate within a year. Since the 1970s, Earth Overshoot Day has moved earlier almost every year. In 2022, Overshoot Day is July 28th. What that means is we are currently using 1.75 the earth’s worth of resources each year.
The Consequences of Excess Waste
The excess use of resources puts a strain on our ability to manage the waste that occurs. Nearly every human activity produces waste and greenhouse gas emissions. Waste pollutes oceans and waterways, or ends up in landfills where it produces methane, a greenhouse gas far more powerful than CO2 in the short term. But CO2 emissions also remain in the atmosphere for centuries contributing to global warming and climate change.
Unless global emissions are reduced to zero and greenhouse gases are removed from the atmosphere, the planet will continue to warm.
This dilemma is presenting new opportunities for investors, who can invest in companies working to design, manufacture, and dispose of products in better ways. By investing in green stocks, we may be able to improve resource management, mitigate climate change, and move Overshoot Day back towards December — so that we stop exceeding the resources the earth produces each year.
Green Investment Opportunities
Green investments are not only beneficial for the planet and all of humanity, they can also be great financial opportunities. Sectors such as renewable energy, electric vehicles, and plant-based meat alternatives are growing quickly and will likely continue to do so. Green investments can include stocks, exchange-traded funds or ETFs, mutual funds, index funds, and more.
In 2021, U.S. mutual funds with a focus on sustainability saw inflows of about $70 billion. This marked a 36% increase over 2020. And according to a report by Morningstar, a fund rating and research firm released in Feb. 2022, investors enjoyed returns comparable to, and in some cases better than conventional mutual funds.
Below are a few green tech sectors to consider.
Renewable Energy
Renewable energy stocks are some of the most popular green tech investments. These include companies producing, installing, and distributing solar, wind, hydrothermal, and geothermal energy, as well as companies that make supporting components and services, such as solar panel and windmill producers.
Currently about a quarter of the world’s energy is renewable, and that amount has grown about 8% each year over the past 10 years, and will likely continue to increase even more quickly as concerns about climate change mount.
Waste Reduction
Although recycling of certain materials such as paper, glass, and metal has been around for a long time, thanks to innovations in waste management more and more materials are now recycled and reused. Companies in waste management also handle waste processing and the creation of energy from waste.
Pollution Control
Pollution control includes management and reduction of emissions from cars, manufacturing facilities, and more. Government mandates tend to increase the spread of pollution control technologies.
Carbon Removal and CCS
Carbon removal involves removing CO2 from the atmosphere then storing it or utilizing it in products. CO2 emissions remain in the atmosphere for centuries, so just reducing emissions isn’t enough to stop or reverse global warming and climate change.
Carbon capture and storage, or CCS, tends to refer to point source capture, where carbon is collected right from the factory or source that is emitting it, preventing it from entering the atmosphere in the first place. Carbon removal can be done in several ways, such as Direct Air Capture (DAC), mineralization, growing and sinking kelp, or producing biochar. This is a fairly new sector of green tech, so there are not a lot of carbon removal stocks available on the market yet.
Green Transportation
Green transportation includes electric cars, fuel-cell technologies, solar-powered boats, innovations in aviation, and more.
Green Materials
Materials and products such as plastic, paper, and textiles produce significant waste and emissions. Some companies are working on reducing the environmental impact of materials as well as coming up with alternatives.
Green Buildings and Sustainable Cities
Urban areas produce a lot more waste and emissions than rural and suburban areas. By adopting green building practices, using data to improve efficiency, improving infrastructure and transportation, and other alterations, cities can reduce their environmental impact.
Sustainable Agriculture
Industrial agriculture is a huge producer of greenhouse gas emissions, and farming and livestock practices also use significant amounts of water and chemical fertilizers that can pollute soil and waterways. Companies working to reduce the environmental impact of food production include those in organic and regenerative farming, aquaculture, new forms of pest control, and even plant-based meat alternatives.
Water
Water is one of the most important resources on the planet, and there is a limited amount of fresh water available around the world. Increased droughts and pollution in recent years have increased the urgency for water management, purification, and distribution services, as well as technologies such as desalination and capturing water from the air.
How to Start a Green Tech Investment Portfolio
There is ample opportunity in green tech stock investing. However, there are a few things investors should keep in mind when starting to build a green tech stock portfolio:
• Green tech investments tend to be long-term investments. It takes time and money to develop and deploy green tech, so the return on investment takes longer than with other types of investments.
• Many green tech companies are competing with well-established businesses, such as those in the oil, energy, and transportation sectors.
• Since some green technologies are new, the workers and management behind them may not have as much training or experience in the sector as those in legacy industries might.
• Green tech investing is considered higher risk, and investors should do their own research before choosing stocks to buy. Many startups in the space will fail, and others may take a long time to pay off.
The Takeaway
Green technology is an exciting area of investment that can bring value to people, the planet, and your portfolio. Green stocks can include sectors such as renewable energy, electric vehicles, clean water technology, sustainable agriculture, and more. Green investments can include stocks, ETFs, mutual funds, index funds, so-called green bonds, as well as other sustainable options.
In good news for investors, recent industry research suggests that investing in sustainably oriented funds can deliver returns on par with conventional funds. This may be part of what has inspired growing investor interest in this sector, as reflected by the surge of inflows into green funds in recent years.
If you’re interested in starting to build a portfolio of green tech stocks, it’s really easy to get started when you open an investment account with SoFi Invest. The online trading app lets you research, track, buy and sell stocks, ETFs, and other assets right from your phone. All you need is a few dollars to get started.
FAQ
Is green tech a good investment?
Green tech stocks have shown to be more resilient during economic downturns, and the demand for green tech will likely continue to rise in coming years. That said, green tech stocks can be risky because it is still considered a new sector, and many companies may go out of business as it develops.
What’s the difference between green and ESG?
ESG stands for Environmental, Social, and Governance. So while green stocks focus on the environment, ESG stocks also include a focus on social equity and social justice, governance issues, and other topics.
How can oil companies be in ESG indexes?
Although oil companies are some of the world’s biggest polluters and greenhouse gas emitters, they also make major investments into renewable energy and other green tech innovations. As a result, some oil companies are included in ESG-focused funds.
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