What is Green Investing?
Although green investing can be
interpreted in different ways depending on an investor’s moral values and
financial objectives, we define it loosely as follows:
Green investing is a process of making
investment decisions based on environmentally conscious criteria with a purpose
of:
* actively improving the health of the
environment, and
* generating a certain amount of
financial return on investments made.
The key point to keep in mind when
discussing this area is that investors are all too aware of the environmental
problems around the globe. They want to use their money to encourage the
development of solutions to these problems.
In other words, environmental
investors put their values at the front of their investment decision-making.
Yes indeed, values have recently
become a new dimension of the investment universe. They are now driving the
demand for a wider range of investment products which incorporate investors’
desire “to do well [financially] by doing good [ethically]”.
Making Sense of Terminology
If you want to try your hand at
value-based investments, you can easily get lost in the sea of terminology and
ambiguities surrounding this field.
Let’s try to make sense of the terms
used.
Green investing is generally
associated with the following commonly used terms:
• Environmental
Investing
• Ethical
Investing
• Socially
Responsible Investing (SRI), or simply Responsible Investing
• Sustainable
Investing
To understand what exactly these
phrases mean, let’s introduce a concept of investment screening (or screens).
To construct portfolios of value-based
investments, investment professionals use the processes of negative screening
and positive screening.
Negative screening is used to sift out
investments in sin industries, such as alcohol, tobacco, gambling, weapons
manufacturing.
Conversely, positive screening is used
to include good industries and companies; for example, “pollution solution”
industry, or the companies which promote outstanding business and social
practices such as fair trade operations.
There is a clear trend among
investment professionals to use positive screening instead of simply avoiding
the industries that their clients disagree with.
Getting back to our terms above.
Green investing applies positive
screens to select industries and companies which are actively involved in
solving environmental issues, rather than simply choosing environmentally
neutral ones.
Among the most prominent industries
here are:
• Renewable
Energy
• Water
Technology
• Green
Cars
• Green
Building
• Energy
Efficiency
• Reforestation
We discuss green industries in more
detail here.
Green investing is a “niche”
opportunity which focuses on environmentally proactive sectors.
Environmental investing is its synonym
and can be defined in the same way. We discuss environmental investing in more
detail here.
Ethical investing, socially
responsible investing and sustainable investing are wider concepts.
Ethical investing applies negative
screens to eliminate “unethical” industries considered to cause harm to people
and the environment. (1) Such industries may include alcohol, tobacco, gambling
etc.
Socially responsible investing (SRI)
uses both negative and positive screens to eliminate undesirable industries and
include desirable ones (2), for example green industries discussed above.
However, recently there seems to be a
progress towards interchangeable use of both terms, and ethical investing is
often defined within the same boundaries as SRI (i.e., applying both positive
and negative screens). (3)
It is interesting to note that many
socially responsible mutual funds have policies of non-investment in animal
testing companies.
This is crucially important as animal
testing is just one of the causes of animal endangerment that may even lead to
animal extinction.
Sustainable investing is a more recent
concept, and its main difference from SRI appears to be its emphasis on
companies of any sector which are “best of breed” (or “best of class”, or “best
of sector”), i.e. the ones that best meet a defined set of environmental,
social and governance criteria (ESG).
Theoretically sustainable investments
can be made in any industry, but in practice many sustainable investment funds
still apply traditional SRI exclusions although “values-based exclusions should
be understood as additive or collateral to the primary financial focus” (4).
Since there are a lot of similarities
between these two concepts, they are also often used interchangeably.
I have even stumbled upon a creative
attempt to combine these two ideas into one definition.
Calvert Group provides the following
definition:
SRI = Sustainable and Responsible
Investing (5)
as compared to the historic definition
of:
SRI = Socially Responsible Investing
So be it then!
Conclusion
We can see that green investing can be
defined either as a separate value-based investment category; or as part of
ethical, socially responsible or sustainable investing.
Already, there are many value-based
investment products both in the US and internationally.
They offer a number of investment
opportunities which investors can choose according to their own ethical and
financial objectives.
For environmental investors, putting
money into funds and companies with the environmental focus is, of course, the
best way forward.
