You may be familiar with the general concept of socially responsible investing. It’s a strategic method of investing that can help you demonstrate your values by taking environmental, social, and corporate governance (“ESG”) factors into consideration while building your investment portfolio. The environmental factor of the ESG framework is often called, “green investing,” which is the focus of this article.
How Do You Invest Green?
As is true with other SRI-centric investment approaches, green investing may seek to avoid investing in the securities of some companies through negative screening, i.e., by excluding certain businesses from investment consideration. The exclusion is usually based on a company’s negative environmental profile, a combined analysis of its environmental impact and environmental policies.
The “bad guys” are generally companies competing in environmentally unfriendly industries, such as utilities providers that rely heavily on burning fossil fuels. Considered by some to be jeopardizing public health and damaging the environment, companies in the so-called “Filthy 15” list of the largest U.S. coal-burning companies are one example.1
Thus to invest green, an investor might consider modifying the negative screening approach to maintain a broad market exposure by investing only in companies that have higher ESG ratings.
Another Green Investing Approach
Another approach to building a green investment portfolio is based on positive screening, i.e., actively searching for certain types of companies. Green investors often emphasize their portfolios with companies that represent particular governance and business practices, as these aspects in many cases can be correlated to the company’s environmental impact, green policies, and reputation. Green investors may also seek companies that belong to specific green industry segments, including clean technology, renewable energy, smart grid, energy storage, green building, sustainable transportation, water, recycling industry, organic foods, and healthy living.
Is There a Price for Going Green?
According to at least one high-profile investment professional, the price for investing green is often decreased investment returns.2 Joseph Dear, the chief investment officer of the California Public Employees’ Retirement System (CalPERS), the largest pension plan in the nation, recently called green/clean-tech investing a noble way to lose money.3
But that’s not always the case.
Investors don’t always have to sacrifice performance in the name of their environmental values, as a great number of investment solutions are now available.
But these solutions all start with a conversation- talk to your investment advisor, as they need to know what’s important to you before they can help you achieve your goals. Nobody likes losing money, even when it’s done in “a noble way.”
