What is Green Investing
Often conflated with socially responsible investing (SRI), green investments are essentially investment activities that focus on companies or projects that are committed to the conservation of natural resources, the production and discovery of alternative energy sources, the implementation of clean air and water projects, and/or other environmentally conscious business practices. Green investments may fit under the umbrella of SRI, but are fundamentally much more specific.
Pure-play green investments are those that derive all or most of their revenues and profits from green activities. Green investments can also be made in companies that have other lines of business but are focusing on green-based initiatives or product lines.
BREAKING DOWN Green Investing
The term "green," despite becoming a nearly ubiquitous one, can be somewhat vague. When people talk about "green investments," they're speaking generally of investing in activities that, in a popular context, can be considered good for the environment in a direct or indirect manner.
Some of the options an investor has if they want to build a green portfolio include securities, mutual funds, ETFs and bonds. Green mutual funds include: the TIAA-CREF Social Choice Equity Fund (TICRX); Portfolio 21 Global Equity Fund Class R (PORTX); and the Green Century Balanced Fund (GCBLX). Green bonds can sometimes be offered by governments and generate revenue for funding projects or businesses.
Because individual beliefs on what constitutes a "green investment" vary, exactly what qualifies as a green investment is a bit of a gray area. Some investors are interested only in more pure-play options like companies that do research into or make products like renewable fuels and energy-saving technology. Other investors put money behind companies that simply have good business practices when it comes to the way they use natural resources and manage waste, but draw their revenue from multiple sources.
Purchasing stock in a business that is an industry leader in terms of employing environmentally conscious businesses practices in a traditionally "ungreen" industry may be considered a green investment for some, but not for others. For example, consider an oil company that has the best record for environmental practices. While it is environmentally sound that the company is taking precautions to limit direct damage to the environment through its day-to-day operations of drilling for oil, some people may object to purchasing its stock as a green investment, because burning fossil fuels is the leading contributor to global warming.
Investing in "green" companies can be riskier than other equity strategies, as many companies in this arena are in the development stage, with low revenues and high earnings valuations. However, if investors find protecting the environment by encouraging eco-friendly businesses to be important to them, green investing can be an attractive way to put their money to work.
All investors should be wary of companies that simply bill themselves as green for branding purposes without following through with their pledges. Therefore, prospective green investors should research their investments (by checking out a green fund's prospectus or a stock's annual filings) to see if an investment includes the types of companies that fit their personal definition of "green."