Investing can be one of the most powerful ways to reach longer-term financial goals. Compound interest can eventually turn even small contributions into large sums, especially when investors contribute regularly.
But for the socially conscious and eco-minded, growth potential isn’t enough. They want to put their cash behind companies and endeavors that support their personal values—including keeping the Earth green and healthy for generations to come.
Green investing, or investing in green stocks, is one way socially conscious savers are aiming to align their financial goals with their wider belief systems.
Green investing is all about using investment dollars to support projects and organizations that are committed to sustainable, pro-environment practices.
Keep reading to learn more about getting started with green investments, including what, exactly, makes an investment green and ways to choose specific green stocks to add to a portfolio.
What Is Green Investing?
Green investing, sometimes also known as eco-investing, is a practice where investors use their investment dollars to back businesses and other enterprises that are eco-friendly.
These may be companies that implement green policies in their day-to-day operation or firms that are specifically committed to implementing conservation, developing renewable energy sources, educating the public about green initiatives, and more.
Green investing is a subset of a wider investment strategy called socially responsible investing, or SRI. As its name suggests, SRI is a tactic where investors allocate their assets to support endeavors that line up with their personal belief systems, particularly in areas like sustainability and social justice.
All of these practices are also sometimes known as impact investing, in that they’re investments with goals including making some sort of external impact on global or social issues.
Of course, the first goal of investing remains the same: to create a passive income stream through compound interest, namely via appreciation of asset value, and potentially dividend payments. Investments are commonly used to fund bigger, longer-term financial goals, such as becoming a homeowner, buying a new car, or funding a retirement.
Pure-Play Green Investments
Within the umbrella of green investments, there’s a subcategory: pure-play green investments, which refers to investments where the majority of revenues and profits are derived from green activities.
For instance, investing in a company whose sole focus is renewable energy is a pure-play green investment, whereas investing in a company whose business is separate—but which claims to be committed to performing that business in a sustainable, ece-friendly manner—is a green investment, but not a pure-play one.
Both pure-play and non-pure-play green investments might help create a healthier environment while growing an investor’s funds. And all kinds of green investments fall into the large umbrella of socially responsible investing.
Green Investing vs. Socially Responsible Investing
Green investing is just one way to invest in a socially responsible way. Socially responsible investing is the wider category green investing falls into, and it includes companies that implement positive social policies.
Socially conscious investors are particularly interested in companies that make intentional choices, both internally and externally, surrounding the following topics:
• Political spending and lobbying
• Climate change and green initiatives
• Non-climate-related environmental issues
• Human rights
• Social justice
• Equal opportunity employment
Socially responsible investing is a tactic that’s increasing in popularity and influence in the United States.
According to the 2018 Report on U.S. Sustainable, Responsible, and Impact Investing Trends, more than $12 trillion in domestic assets were allocated based on environmental, social, and governance criteria at the beginning of that year. That’s an increase of 38% from the previous report, made in 2016.
Along with the topics identified above, socially conscious investors are also interested in companies’ views on tobacco use, terrorism, and corruption — but climate change was the most important issue considered by money managers when allocating assets.
That means green investing is on-trend—and may be an accessible way for just about anyone to make an impact on this important and pressing issue.
Pros and Cons of Green Investing
Although green investing is one way for investors to put their money where their mouths are, so to speak, there are both benefits and drawbacks to consider before committing to this method.
Pros of Green Investing
• Green investing is a readily available way to make an impact on issues investors are passionate about. While volunteering may not be possible for people with existing commitments, investing can be done with the click of a button.
• Green investing could potentially help the investor while helping the planet. Unlike making a donation, investors who back green initiatives have the potential to make their money back and then some through stock market interest growth. Of course, as with any investing, there’s always risk.
• Green investing could help make the world a better place, not only by supporting green initiatives themselves, but also by supporting the businesses and organizations that put those policies in place.
Cons of Green Investing
• Green investing might not always lead to the most financial growth. When investors focus on ethics first, they might overlook some lucrative opportunities that fall outside the scope of their social goals.
• It can be difficult to determine which companies are truly focused on socially responsible or green initiatives. Some companies may claim to implement sustainable practices on the surface, while they also engage in practices behind the scenes that are not pro-environment.
Getting Started With Green Investing
If an investor is interested in trying out green investing, there are a variety of accessible ways to get started. Thanks to the proliferation of online brokers, investors can begin making ethically conscious stock market purchases without ever leaving their homes.
But it might be worthwhile to review some stock market basics before deciding on any sort of investment strategy—and to put in some research to ensure the chosen assets are actually aligned with the investor’s stated values.
How Green Stocks Make Money
While green stocks might help create a better world by supporting green practices and initiatives, they also stand to help an investor build wealth in two primary ways:
• The increasing value of asset worth, which creates a profit when the assets are sold down the line
• Dividend payments, which are paid to shareholders on a regular basis (often quarterly) simply for holding the stock
It’s important to understand that all investments, and particularly stock market holdings, come with some risk.
The cash value of a stock is based on its perceived potential, supply and demand, and a variety of other factors—the market is vulnerable to fluctuations and setbacks, and is often influenced by world events. (Take, for instance, the recent downturn in response to the global threat of the novel coronavirus.)
Many experts agree that holding onto stocks over the long term, even during worrisome bear markets, may be the best strategy for building as much wealth as possible over time.
Over a longer timeline, stock market indices show growth, even when factoring in the most troubling economic downturns. The average annual return indicated by the S&P 500, which tracks the performance of the 500 largest publicly traded companies in America, stands at roughly 10% for the period of time between 1927 and 2017. That figure includes both the Great Depression and the 2008 crisis.
Though long-term investors have weathered some of the most serious crashes to come back on top, it is possible to lose money in the market.
And while some ambitious investors aim to live off the passive income created by dividend earnings, for the average earner, it’s more feasible to use investing to fund long-term goals than to create short-term cash flow.
Types of Investment Accounts
Since investments are used to fund a wide variety of financial goals, a wide variety of investment account types are available to help savers meet those goals as effectively as possible.
For many consumers, the main investment vehicles are retirement accounts and regular investment accounts, though other specialized investment plans, like 529 plans for college education, are also available.
Retirement investment accounts are built specifically to help holders reach their long-term retirement goals. As such, they have certain tax advantages but also certain restrictions and limitations, including age requirements to make penalty-free withdrawals.
Some of the most common types of retirement accounts include:
• 401(k) and 403(b) plans, which are sponsored by an employer and allow an employee to contribute a portion of their salary each pay period
• IRAs, or individual retirement accounts, which are available to use whether the account holder is employed or not, but carry contribution maximums and income phase-outs
While retirement accounts carry specific limitations as to when and why money can be withdrawn, certain accounts allow contributions and earnings to be taken out of a regular investment account, or brokerage account, at any time. These accounts allow investors to make investments on their own terms—but investors still might want to hold assets for a longer period of time.
That’s because the money earned on short-term capital gains, or assets held for less than a year, is taxed at higher brackets than the money earned on long-term capital gains profits.
Also, regular investment accounts don’t carry the tax incentives or special privileges that retirement accounts do.
Choosing Green Stocks
The most critical part of turning regular investing into green investing is thorough research. Are the shares being considered actually green stocks?
If purchasing individual stocks from specific companies, an investor might want to ensure those enterprises are actually walking the green walk, and not just talking the green talk.
While it can be difficult to discern a company’s true intentions and actions based only on its marketing, which might spin its decisions as favorably as possible, doing a deep dive can go a long way toward giving an investor a more complete picture of a company’s true stance.
Investors could look for news articles concerning a company’s production methods or read the literature the company publishes on its own website about conservation and sustainability.
An investor interested in making green investment decisions might look specifically for companies in the following fields:
• Wind energy
• Solar energy
• Geothermal energy
• Other types of renewable energy sources
It might also be helpful to look for companies that are certified B Corporations, or B Corps, which meet a high, set standard for environmental sustainability in their practices as well as other metrics like public transparency and social justice.
B Corps can be any kind of company, from bakeries to funeral homes (and may or may not be publicly traded).
Investors could also choose an ETF (exchange-traded fund) or mutual fund built specifically on companies focusing on green initiatives, like renewable energy. ETFs and mutual funds are baskets of assets pre-curated by a third-party custodian or financial institution.
These options allow investors to get a lot of diversification with only a small amount of personal effort and research, and can be a great way to get started with green investing.
Getting Started With Green Investing Through SoFi
Although many online brokerages are available, SoFi Invest®️ offers a comprehensive investment platform that can help get new investors up and running quickly, easily, and, perhaps most importantly, with no trading fees.
SoFi offers both active and automated investing options, for those who want to be as hands-on or hands-off as possible. Either way, investors will have tons of guidance and resources to help them figure out exactly how it works along the way.
SoFi also offers a suite of ETFs, as well as fraction share investing so investors can get their foot in the investing door of even the largest, most well-known companies.
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