Does investing in sustainable or "green" companies provide lower returns?

By Ken Clark AAA
A:

To determine the kinds of returns that can be expected from investments in sustainable or "green" companies, the distinction must first be made between green industries and companies with green policies.

The green industry is comprised of companies whose products or services directly benefit the environment. Some of these companies may provide green products for domestic use, while others may provide products and services to help other industries operate in a more environmentally friendly way. Companies with green policies represent businesses that have adopted practices or guidelines that lessen the impact of their operations on the environment.

As environmental consciousness has moved to the forefront of our culture over the last few decades, the green industry is a sector that may be poised for substantial growth. Even so, the ability to earn a competitive return on a stock from this industry ultimately will depend on each individual company's ability to grow a profit, as well as on the price of its stock. The price of stocks in green companies, as with other good companies, can be overpriced, so investing in sustainability could come at a higher cost.

On the flip side, the effects that green policies have on stocks in conventional industries also must be taken into consideration. While companies in the green industry are poised for growth, their profits will come at the expense of the established companies they serve.

"Going green" may be the right thing to do for many companies and sectors, but doing so doesn't necessarily come cheap. Whether the goal is to clean up a factory or to switch to alternative fuels for delivery vehicles, the cost of environmental responsibility can reduce a company's profits and slow the growth of its stock. Investors should take note of the current and potential costs of going green for any company they consider adding to their portfolios.

(To learn more about green investing, check out our related articles What Does It Mean To Be Green?, Top 10 Green Industries and our Green Investing Feature.)

This question was answered by Ken Clark.

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