What is green investing?
Broadly speaking, green investing is the practice of considering the impact on the natural environment while selecting investments. It's also sometimes referred to as environmental, environmentally friendly, environmentally conscious or eco investing.
Green investing is often misidentified with environmental, social, and governance (ESG) investing and impact investing. but is distinct in that it focuses on the environmental impact of investments.
Green investments are traditional instruments with underlying assets that align with a given set of environmental criteria. This includes companies and ventures that adhere to environmentally responsible practices, as well asnew technologies to help the world transition to net zero.
There is no universal definition of a 'green investment' in the financial services industry, making environmentally friendly investing a complex landscape for individual investors to navigate. It requires significant expertise to find investments that align with your environmental values, while also effectively supporting your financial goals.
Special considerations of green investing
Green investment performance
Investment returns aren't the only goal of environmental investing, yet financial growth is still an important part of the equation. Since green investments are a relatively new type of financial instrument, there's limited historical information compared to traditional assets, making it difficult to assess their ability to deliver strong results.
There are, however, some indicators that eco-friendly investments don't have to mean lower returns. A 2021 study from Morningstar Inc. found that most sustainable funds delivered stronger total and risk-adjusted returns than their respective Morningstar Category indices. Environmental factors are also one of the facets of ESG criteria and some studies suggest that better ESG scorings could indicate greater-than-average long-term performance. Please bear in mind, though, that the past performance of any investment doesn't guarantee future results.
Despite the absence of decisive historical evidence, many investors believe environmentally consciousinvesting offers them the best chance of long-term profits in the future. With the impact of human influence on climate change becoming increasingly apparent, there's a growing demand that companies take ownership of and be transparent about their impact on the environment.
As the world moves in this new direction, companies and organisations that employ outdated and unsustainable practices will likely face higher costs and regulatory barriers, potentially limiting their ability to deliver returns to investors. Conversely, companies and organisations that successfully implement sustainability measures and drive change may prosper.
Subjectivity in green investing
The definition of what makes an investment 'green' or 'environmentally friendly' can vary from one investor to another. For example, some investors might see nuclear energy as a viable substitute for fossil fuels and therefore consider investments in this space as environmentally friendly. Yet considering the damage that nuclear accidents can wreak on the environment, other investors might not want to include investments from this industry in their portfolios.
Moreover, there are various definitions of 'green investing' used in the financial industry. Due to the lack of consensus and the complex nature of investment funds, investors might unwittingly invest in companies or projects that don't align with their positions on the environment. For these reasons, investors must carefully research their investments to ensure they meet their personal definition of 'green'.
Green investing vs greenwashing
Greenwashing refers to the practice of spreading misleading or false information about the environmental impact of a company. It's typically done to capitalise on the growing demand for sustainability or downplay the company's involvement in environmentally damaging practices.
The concept of greenwashing is usually used in the context of companies marketing their products and services. Yet it also exists in the investing world, in which the sustainability of investments is exaggerated. Since branding alone isn't enough to gauge commitment to sustainability, investors must conduct thorough research to ensure the assets they invest in genuinely align with their values.
With Greenbank, you can make your investments work for what you believe in. After understanding what matters most to you, we'll construct a portfolio that matches your values and can help you reach your financial objectives.
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