What is Environmental Investing?
By Irina Bright.
Environmental investing is a process of making investment decisions which are expected to produce a positive impact on the environment and generate certain amounts of financial return on the capital invested.
Protect the planet with your investments
It is a wide area, and as such there is no clear agreement as to what exactly should be included within its scope.
There are many other definitions (for instance, socially responsible investing) which encompass the idea of environmental / green investing, and are discussed in the Green Investing Defined article.
By its very definition, environmental investing is a tool for dealing with major international problems of environmental pollution in general, and global warming in particular.
Some experts point out to other specific issues that may be targeted by environmental investing: (Ref. 1)
- Waste management
- Rainforest destruction
- Feral animals
- Weeds
- Species extinction
- Land salinity
- Declining wild fish stocks
- Water availability
- Water quality
Since the use of fossil fuels such as oil & gas is the main cause of pollution and global warming, the most important mission of environmental investing is therefore to facilitate the development and implementation of renewable green sources of energy (such as solar and wind sources) for wide use in industry and agriculture.
Among other industries suitable for environmental investing we've got:
- Energy efficiency
- Green building
- Green cars
- Organic food / agriculture
- Carbon emissions market
- Reforestation / Timber plantations
Of course, there will be other economic areas which we can consider “clean” and suitable targets for the environmental capital.
What is The Market Like?
It is no surprise that green investors may feel inundated with the information of environmental claims by virtually every company that is willing to raise capital on the market.
Just for analytical purposes, let’s identify “pure play” environmental companies and more traditional companies with “add-on” environmental aims.
Pure play environmental companies are the ones whose whole and sole purpose is to help solve a certain environmental issue (or a number of those).
For example, start-up or more established companies that will only perform research into renewable energy with the purpose of introducing this new technology into the market.
Companies with add-on environmental aims are businesses which are trying to convert their old practices into more environmentally friendly ones, or introducing new clean and efficient technologies.
My personal favourite example here is that of Google Inc. This company’s main business area is online searches and advertising. And while the environment as such is not their main business focus, this company invests more in the environmental causes than any other company of similar scope that I am aware of.
In addition to more traditional investment targets, there will be a plethora of eco focused projects suitable for venture capital funding as well.
Investors have a choice either to invest in their desirable stocks directly, or via mutual funds.
Environmental Investing – Beware of Greenwashing
As I have said above, it is difficult to put exact boundaries around the field of green investing.
The looseness of its definition is both a plus and a minus from the perspective of the effectiveness of its results.
On the one hand , the higher the number of green products and services added to the field of green investing, the better for the overall health of the environment.
On the other hand , many companies are now tempted to jump on “the green bandwagon” trying to persuade us that their operations are eco friendly and that we should be buying their products.
But in reality, these businesses will only be applying “greenwashing” strategies for better marketing results, instead of making real environmentally conscious changes to their operations.
My personal "favourite" example here is that of nuclear industry which tries to present nuclear energy as a green environmentally friendly resource, which of course is not true.
It is very important to know all the ins and outs of environmental investing to see through such greenwashing traps.
So when investors need to make a decision on whether to invest in a certain project/company or not, one of the main criteria for their decision-making should be the extent of the positive environmental impact that such investments will be expected to produce.
Environmental Investing as Part of Socially Responsible Investing
The term environmental investing is also part of the process called socially responsible investing (SRI).
SRI screening process is widely used by fund managers to construct investment portfolios for socially aware customers.
Environmental sustainability is just one part of the SRI process which also involves the screening of such areas as human and animal rights, diversity and consumer protection, to select stocks for SRI-focused portfolios. (Ref. 2)
While socially responsible funds may include stocks that best meet the SRI’s criteria from a number of industries, pure environmental funds are exclusively focused on the companies which are actively seeking to improve the state of the environment. (Ref. 3)
In other words, you are likely to see very familiar companies presented in SRI funds, and quite unfamiliar ones with environmental funds.
Environmental investing may also be part of sustainable investing.
Environmental Investing - Is It Worth It?
Of course, it is.
Environmental problems are all too obvious, and we can’t ignore them. Many people realise just how important it is to put our energies into providing solutions for the most important issues affecting our habitat.
Though it may still sound very much like “a niche”, green investing is certainly gaining traction among a wider pool of investors and starting to attract serious attention of the world’s governments and international institutions alike.
The possibility of earning a respectable income and at the same time making this planet a better place for every living being is right in front of us.
Let’s use it wisely.
Written by: Irina Bright
Original publication date: 2008
Republication date: 2020
References
1. Bivell, V. (June, 2008) What is Environmental Investment? Eco Investor Magazine. Retrieved July 31, 2008 from http://www.ecoinvestor.com.au/Articles/What_Is_Environmental_Investment.htm
2. Socially responsible investing. (July 28, 2008). In Wikipedia, The Free Encyclopedia. Retrieved July 31, 2008 from http://en.wikipedia.org/w/index.php?title=Socially_responsible_investing&oldid=228473251
3. Bivell, V. (June, 2008) What is Environmental Investment? Eco Investor Magazine. Retrieved July 31, 2008 from http://www.ecoinvestor.com.au/Articles/What_Is_Environmental_Investment.htm