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 is becoming increasingly popular as more and more people look for ways to positively impact the environment. They want to put their cash behind companies and endeavors that help them build wealth and support personal values—including keeping the Earth green and healthy for generations to come.
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.
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.
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Pure-Play Green Investments
Pure-play 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.
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Green Investing vs Socially Responsible Investing
Green investing focuses on companies that are considered to be environmentally friendly. Socially responsible investing 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.
3 Ways to Invest in Green Energy
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.
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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 a more attractive investment than traditional bonds.
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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.
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Benefits and Risks of Green Investing
Green investing is one strategy that investors can use to build wealth. However, there are both benefits and risks to consider before committing to this method.
Benefits
There are several reasons why investors might choose to invest in green businesses. Some investors believe that companies with strong sustainability practices will outperform those without them over the long term. They point to research showing that companies with good sustainability scores have lower capital costs and better employee retention.
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
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 their less sustainable peers.
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.
Has Green Investing Been Profitable?
Green investing may be profitable, depending on the definition of green investing and the time frame considered. For example, a study by Barron’s found that shares of 100 companies in its list of America’s Most Sustainable Companies returned 34.4% in 2021, outpacing the 28.7% gain in the S&P 500 index. Additionally, a 2020 Morningstar study found that the average annual return of a sustainable fund was 6.9% over ten years, compared to a 6.3% average annual gain in a traditionally invested fund.
However, some analysts have criticized these studies, noting that tech stocks, which make up a large portion of sustainable funds and investments, have outperformed the overall market during the past ten years. In a different market environment in the future, the gains of potential green investments may not outpace a broad market index.
The Takeaway
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.
Investors interested in making green investments can use the SoFi app to help. With SoFi Invest®, you can trade stocks and ETFs to build a green portfolio. And if you’re not ready to pick stocks and ETFs by yourself, SoFi’s automated investing service will build a portfolio for you with no SoFi management fee.
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