In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about Green Investments.
Green investments, also known as eco investments, are investment activities that target companies focusing on environmentally conscious business projects or practices. This includes, but is not limited to, protection of natural resources, production of clean energy resources, or execution of sustainable projects. Green investments are a type of Socially Responsible Investing (SRI) but they are much more specific than SRI.
Green investments, according to some investors, are investments in any company that has eco-friendly policies and practices guiding its day-to-day operations and future growth. Other investors argue that a company can only be considered a green investment if it is directly involved in environmentally beneficial products or services, such as renewable energy or compostable materials. However, the idea is simple: a green investment should have a positive environmental impact. As a result, green investments are becoming increasingly popular among those seeking to align their financial lives with their environmental values.
Green issues have taken the center stage in the financial world. Many investors started looking for companies that were “better than their competitors in terms of managing their environmental impact” in the 1990s. While some investors continue to concentrate their funds on avoiding only “the most atrocious polluters”, many investors have shifted their focus to using money in a positive, transformative way.
Since 2007, over $1.248 trillion has been invested in solar, wind, geothermal, ocean/hydro, and other green sectors, according to the Global Climate Prosperity Scoreboard, which was launched by Ethical Markets Media and The Climate Prosperity Alliance to track private investments in green companies. This figure includes investments from North America, China, India, and Brazil, as well as investments from other developing nations.
SRI, ESG, and green investing: what is the difference?
Environmental, Social, & Governance (ESG) criteria refers to healthy practices undertaken by firms. It helps investors to analyze potential investments that may have a prominent impact on the environment/society. ESG criteria are integrated to enhance the traditional financial analysis of investment by identifying potential risks and opportunities beyond purely financial valuations. The main objective of ESG evaluation remains financial performance, even though social performance is also taken into account.
Socially Responsible Investing (SRI) is a step up to ESG since the investment process actively eliminates or selects investments according to specific ethical agendas. SRI uses ESG criteria (which facilitate valuation) to apply negative or positive screens on the investments.
While green investing is often lumped together with SRI or ESG criteria, it is technically not the same thing. To be clear, green investing could be considered a type of SRI and ESG criteria. But while SRI and ESG criteria also includes companies that make quality choices with regards to human rights, social justice or other positive social impacts, green investing sticks solely to companies with environmentally beneficial policies and products.
Understanding Green Investing
Green investments that generate all or majority of their profits from green activities are termed as pure-play green investments. Despite its widespread use, the term “green” can be ambiguous. When people talk about “green investments,” they are referring to activities that, in a popular sense, are either directly or indirectly beneficial to the environment.
What qualifies as a “green investment” is a bit of a grey area because individual beliefs on what constitutes a “green investment” differ. Some investors prefer pure-play investments, such as companies that conduct research or manufacture renewable fuels and energy-saving technology. Other investors back businesses that not only follow good business practices in terms of how they use natural resources and manage waste but also generate revenue from a variety of sources.
For some, buying stock in a company that pioneers environmentally conscious business practices in a traditionally “ungreen” industry may be a green investment, but for others, it isn’t. For example, an oil company that has a good track record in terms of environmental practices. While it is environmentally sound for the company to take precautions to limit direct environmental damage, some people may object to buying its stock as a green investment because such companies are a primary cause of global warming since they indulge in burning of fossil fuels.
Advantages and disadvantages of green investing
Green investing is a fantastic way to financially support companies that share your environmental values. However, all investments have advantages and disadvantages, and green investing is no exception.
Advantages of green investing
Supports environmentally conscious businesses
When it comes to bringing positive environmental change, it can sometimes feel like an individual does not have much power as an individual. However, by investing in environmentally friendly businesses, an individual investor can, directly and indirectly, encourage them to make environmentally sound decisions.
Aids in the financing of new environmental innovation
As the climate changes, our world faces a slew of new challenges. Dealing with these issues requires a significant investment of financial resources. As a result, investing in environmentally friendly businesses can aid in the development of new green technologies.
Long-term growth potential
As countries around the world seek to mitigate the effects of climate change, renewable energies and other environmentally friendly products and services are well-positioned for long-term growth. This means that a small investment in a green business now could pay off handsomely in the future.
Disadvantages of green investing
The potential for short-term losses
While there is a lot of hope that green investments will be financially successful in the long run, they may not be as successful in the short term as other businesses. Green investments may result in losses or only modest gains in the near future, as eco-conscious companies will not compromise their values for financial gain.
Finding green investments is difficult
While many companies believe that slapping some green packaging on a product qualifies them as an environmentally conscious company, this is far from the case. This could make it more difficult for someone to find good green investments as an investor. To determine whether a company is truly committed to positive environmental policies and action, one must often conduct extensive research.
Policies and practices of a company can change at any time
It’s important to remember that policies and practices of a company can change at any time, and not always for the better. A new CEO or stakeholder pressure can cause a company to abandon its green initiatives, lowering the ethical value of your investments.
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About the author
The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).