What Is Green Investing?
The world is going green, from recycling and power generation to organic groceries and sustainable fisheries. Almost everyone is interested in easing the burden humanity places on the environment, from climate scientists to businesses, consumers, and politicians.
- Green investing seeks out investment opportunities that also benefit the natural environment.
- One major destination for green funding is renewable energy technologies, such as wind, solar, and hydropower.
- Green transportation is another emerging technology, reducing fossil fuel consumption through electric vehicles.
- Pollution controls, waste reduction, and sustainable agriculture are alternative avenues to environmental protection.
- Water is another diminishing resource, with many mutual funds focusing exclusively on water infrastructure.
Understanding Green Investments
Green investments are businesses or funds that seek ways to reduce harmful pollutants or use resources more sustainably. This can come in the form of alternative technologies, such as solar/wind power, or researching ways to use resources more efficiently.
Eco-friendly investments can provide profits as well as environmental benefits. As the world adjusts to climate change, older technologies such as fossil fuels and polluting industries are likely to face higher costs and regulatory barriers, providing a market opportunity for alternatives. Many mutual funds and index funds seek out these alternative investments, hoping for strong returns in the future.
The following are some of the major avenues for green investing.
Green energy is a hot topic in a world concerned about climate change. Power generation that doesn’t rely on the burning of fossil fuels to generate electricity for our homes or industries is creating a growing number of investment opportunities. Water, wind, and solar are among the top sources of renewable energy.
Human influence is unequivocally to blame for the warming of the planet and some forms of climate disruption are now locked in for centuries, according to a report from the U.N. Intergovernmental Panel on Climate Change. "This report must sound a death knell for coal and fossil fuels before they destroy our planet," said United Nations Secretary-General Antonio Guterres.
Water has also been the go-to resource for renewable energy for centuries. The ancient Greeks ran grain mills on water power. Today, projects such as China's massive Three Gorges Dam can supply electricity to between 70 million and 80 million households. According to the International Renewable Energy Agency (IRENA), hydropower is the most cost-efficient means of generating electricity.
There are few pure-play stocks in the hydro business. However, there are three energy producers with notable amounts of hydropower in their portfolios. PG&E (PCG) has one of the largest hydro operations. Idacorp (IDA) has 17 hydro projects. Meanwhile, Brookfield Renewable Partners (BEP) operates 227 facilities on 87 river systems.
Wind is one of the fastest-growing sources of renewable energy, having increased 75-fold over the past two decades. China leads the world with 288.3 gigawatts of installed capacity in 2020, followed by the U.S. with 122.3 gigawatts and Germany with 62.9 gigawatts.
If this renewable interests you, look for wind farms that sell wind-generated energy or consider companies that manufacture wind turbines. Here again, there are few pure-play stocks, but a few of the interesting wind stocks include:
- General Electric (GE)
- NextEra Energy Partners (NEP)
- Siemens Gamesa Renewable Energy (GCTAY)
- Vestas Wind Systems (VWDRY)
Energy from the sun powers homes, buildings, and a variety of other items from lights to radios. If you think the sun is just starting to rise in this industry, focus your attention on companies that make solar panels, who will benefit as homeowners and businesses increasingly adopt solar power. First Solar (FSLR) is a leading producer of solar modules and systems. JinkoSolar Holding (JKS) also makes solar modules and claims to have delivered 80 gigawatts of production capacity. Sunpower (SPWR) makes solar modules and storage solutions for homes and businesses.
Of course, there’s more to solar than panels. From components to installation, a wide variety of businesses present investment opportunities, including:
Geothermal energy uses heat from the earth to produce clean energy. Ormat Technologies (ORA) builds, owns, and operates geothermal plants, with operations in the U.S., Guatemala, Guadeloupe, Honduras, Indonesia, and Kenya.
The reduction is the key term here. From reducing greenhouse gas emissions on industrial power plants to minimizing the emissions that come out of the tailpipe of your car, the pollution control industry is on the rise. This is the industry that responds every time legislation mandates an improvement in the amount of some harmful chemical that can be released into the environment. Companies and ETFs that focus on pollution control technologies include:
- Fuel-Tech (FTEK)
- VanEck Vectors Environmental Services ETF (EVX)
- Invesco MSCI Sustainable Future ETF (ERTH)
When it comes to transportation, Tesla (TSLA) is the first name on many people’s lists. While an attention-grabbing leader and exciting technology have kept this company in the news, it’s not the only game in town.
On a smaller scale, researchers are working with fuel-cell technology to develop an alternative method of powering automobiles. If this technology works, there are millions of cars—and millions of consumers—waiting for it.
Companies that operate in the space include Ballard Power Systems (BLDP), which produces cells that can be used in vehicles and backup power systems. Meanwhile, FuelCell Energy (FCEL) focuses on providing power options to commercial and industrial facilities.
Recycling has become standard practice. Most people are aware that paper, metal, and glass can be reprocessed and reused, but the number of things you can recycle continues to grow. Waste oil, vegetable oil, batteries, cell phones, computers, and even car parts can have a second life. Recycling these items involves a business enterprise humming along in the background.
Farming and livestock are major contributors to carbon dioxide emissions, not to mention the ecological consequences of agricultural fertilizers and pesticides. There are several ways to reduce agriculture's ecological footprint.
Organic farms eschew the use of pesticides, engage in sustainable farming practices, and sell products that are often healthier to eat than the stuff composed of three-syllable words that you can't pronounce and a shelf-life measured in decades. They also engage in animal management practices that avoid the use of hormones and antibiotics, keeping those chemicals out of the food chain and out of the ground and water surrounding the farms. One of the biggest organic food companies is United Natural Foods (UNFI), a wholesale distributor of healthy food options.
Sustainable fishing is another food-related investment opportunity that is generating attention as the plight of the world’s overfished oceans impacts the human food chain. Mowi ASA (MNHVF), a Norwegian firm with global operations, is an interesting play in this space.
To get the latest analysis and advice on green investing, check out The Green Investor podcast powered by Investopedia.
One of the most important natural resources we have is water. There is considerable fear the world will run out of freshwater due to climate change. Cape Town, South Africa, was months away from running dry in 2018 until swift conservation measures helped to replenish supplies.
The European Environment Agency notes that some 20 European countries depend on other countries for more than 10% of their water resources. Five (the Netherlands, Hungary, Moldova, Romania, and Luxembourg) rely on rivers that flow in from other countries to provide more than 75% of their water. In the United States, cities from Los Angeles to Miami are concerned about water scarcity as climate change takes a toll on water resources.
A portfolio of water investments might include companies that collect, purify and distribute water. The largest water utility company in the U.S. is American Water (AWK), which supplies drinking water to 14 million people. Essential Utilities (WTRG) supplies water to nearly 3 million people. And, sticking with our water theme, these utilities are just the tip of the proverbial iceberg.
If picking individual stocks is too much hassle, mutual funds provide additional ways to invest. The Calvert Global Water Fund and the Virtus AllianzGI Water Fund tap into water-based opportunities across the globe.
Exchange-traded fund offerings include:
- Invesco Water Resources Portfolio ETF (PHO)
- Invesco Global Water Portfolio ETF (PIO)
- First Trust Water ETF (FIW)
- iShares U.S. Utilities Index ETF (IDU)
- Zacks Global Water Index
- Invesco S&P Global Water Index ETF (CGW)
Top Environmental Policies
For many companies, the urge to go green is a relatively recent phenomenon. As with change everywhere, some firms adapt and some don't. Investment managers in the green space have begun to categorize firms by the place they hold along the green spectrum.
Take oil companies, for example. One would be hard-pressed to think of these firms as green, and for the most part, they aren't. But if you take a closer look at their business models, it is easy to see that some are greener than others. In fact, several large oil companies are among the global leaders in promoting a tax on greenhouse gases and investing in energy sources that will help the world transition away from oil. Choosing the firms with the best environmental records and practices is another way of looking at green investments.
Which Developing Countries Are Investing in Green Energy?
China is by far the largest contributor to green energy, both in installed capacity and in production. By the end of 2021, China had installed 288 gigawatts of wind turbines and 253 gigawatts of solar panels and had also established itself as a leading manufacturer of renewable energy equipment and electric vehicles. Brazil, Thailand, and India also have significant generating capacity from renewable energy, according to the International Renewable Energy Agency.
Which Oil Companies Are Investing in Green Energy?
Several major oil companies have made investments in renewable energy and low-carbon technology, including BP, ExxonMobil, Chevron, and Shell. However, these investments still account for less than 1% of their overall budgets, and there is little evidence that these companies are pivoting away from fossil fuels.
How Do You Identify Green Investments?
There are several green funds that target a basket of companies with strong ESG or sustainability credentials. Others focus on specific sectors of the green economy, like renewables. Any of these funds can be an appropriate starting point for identifying green investments. When researching a green fund, be sure to read the prospectus and fund criteria to ensure that the fund's values align with your own.
The Bottom Line
If a green investment catches your eye, there are plenty of ways to find a place for it in your portfolio. You don't have to choose individual companies to get into the area. Mutual funds, exchange-traded funds, stocks, bonds, and even money market funds that focus on the environment are all available.