Understand ‘Green’ Investing and 3 Simple Ways To Do It Well
Ethical or ‘green’ investing is called many names. Let’s briefly count the ways: SRI, ‘impact’, ‘ESG’, ‘Future Growth’, ‘eco’, ‘sustainable’, ‘values-based investing’, ‘socially responsible’, ‘advocacy’. You get the idea.
Some of this codification is a little misleading. Not every ‘green’ investment description means the same thing.
Strip away the syntax clutter and three important ‘green’ categories – Ethical, ESG, and Impact – step forward.
These are the most relevant ‘green’ groups. We’ll take a careful look at each.
By the end of this article, you will feel clearer about which stripe of ‘green’ reflects your own investment values and goals best.
But before that, let’s clear up one prejudice.
Some think that if they invest in ‘ethical’ funds they are giving something up. Like performance. “It’s not the case,” says AdviceBridge’s James Hoare.
Well governed companies simply tend to do better. The economic and social aspects don’t detract from performance.
#1: Ethical Funds – The Low-Down
‘Ethical’ funds were born in the 1980s. They used something called ‘negative screening’ to filter out companies they wanted to avoid.
They steered clear of ‘bad’ or ‘sin’ stocks such as companies connected to weapons or tobacco products.
Ethical funds typically swerved companies that degraded the environment, like oil operators. Political, personal or religious values are often the guiding hand behind an ‘ethical’ investment position.
Which can include a number of other conviction subsets too: human rights, gambling and labour force practices, for example. Also adult entertainment.
Ethical funds, then, are underpinned by a strong moral element. As we’ll see shortly, they take a harder or purer line on social and environmental issues compared to, say, ESG stocks.
Why are ‘green’ funds difficult to understand?
- Frustratingly for new investors, there’s no one standard that defines ‘ethical’ or ‘green’ or any other description – no established ‘Kite’ mark. So be aware of the lack of benchmarks so you don’t end up with the wrong ‘green’ investment
- Buying decisions in this sector aren’t straightforward, often. If you say No to arms makers can you justify investing in tech companies that scoop out precious African minerals? Think of the supply chain labour issues – child labour, for example
- “Let’s say you say No to tobacco,” says AdviceBridge’s James Hoare. “So then what do you do about investing in Tesco? Tesco sells a lot of cigarettes. It’s the most profitable line for them”
#2: ESG Funds – The Low-Down
The ESG acronym stands for Environmental, Social and Governance. This sober-sounding title means an ESG fund might invest across different sectors and categories – perhaps sometimes in ‘sin’ sectors like fossil fuels – while still being ‘a force for good’.
Ethical-lite? That would be simplistic. ESG funds, you might say, take a mindful approach with a strong emphasis on the ‘change’ process. For example, an ESG fund manager may want to invest in a company that could do better.
This fund might lobby its board and deploy its voting muscle to force change through, albeit in a disruptive way sometimes. Excessive boardroom pay, for example, is a red flag for many ESG fund managers.
You might want to invest in a company like BP because it’s basically well run, points out AdviceBridge’s James Hoare. So while it might be digging up fossil fuels, it will have a high ESG score.
Strong governance is often a signpost of well-run companies. But turning a poor-performing company into a robust performer also has profit potential – which some ESG fund managers will want to take advantage of.
Do no harm – responsible investing is older than you think
- Modern ethical investing might seem a modern phenomenon but many of its values stretch back to the 1960s civil rights-era of women’s rights, the anti-war and labour movements – plus a fusion of faith-based values
- But the deeper roots of responsible investing are found in the Methodist movement lead by John Wesley who encouraged his followers not to build links with those who earnt money through gambling, weapons or alcohol
- “Earn all you can, save all you can, give all you can,” implored John Wesley. The Quakers also prohibited involvement in buying other humans – the slave trade. The Quakers and Methodists weren’t against money. But they were against how it was often used and they were strongly against waste. In that sense, both held very modern values
#3: Impact Funds – The Low-Down
Impact investing is different from ESG and ethical investing because it attempts to be socially responsible with a clear, unambiguous action or ‘impact’.
In other words, a strong sense of ‘mission’ is often attached to impact investment.
Impact funds often target and support specific niches such as water sanitation, energy, battery science, housing or healthcare.
This tight focus means they’re appealing to investors who want to feel they’re not damaging our environment in any way – as well as for people who want to be clear of knowing precisely where their money is going (not the case in all investing).
So impact investing is partly about screening out all potential for damage, deploying private capital carefully for positive change.
No surprise that is garnering much support and interest from millennials closely engaged with social issues – what is the best way for me to align my investments with my own goals and values?
As millennials start to control more capital, impact investing may rise further in popularity.
‘Greenwashing’ – is it a thing?
- It is. ‘Greenwashing‘ is when companies claim they are more ‘green’ or ‘eco’ than they really are. Some companies deploy it as a tactic to attract new consumers or shareholders
- The term was coined by US environmentalist Jay Westerveld back in the 1980s. He objected to hotels claiming ‘green-friendly’ credentials for not washing towels every day. He pointed out that hotels were merely saving money by this action
- Much depends on the context and how subjective an issue is: greenwashing means different things to different people. But the internet and information-sharing is making it harder for companies to avoid scrutiny
Does ethical investing pay?
Good behaviour and good performance don’t always go together. The nature of ‘efficient markets’ means the share price of well-run companies can sometimes be higher.
Not always, though. Some sectors simply become unfashionable and exceptionally well-run companies in ‘dull’ areas can get overlooked.
But the really big advantage of investing ethically is that such companies often swerve legal and political risk. Or at least, reduce their exposure to legal action. The threat of climate change means, inevitably, that carbon stocks in the future will face more regulatory and legal hurdles.
The world is changing: getting in on trends – the curbing of plastic waste and an increased interest in water sanitation, for example – will likely continue to pay off for some investors.
Health and well-being is another strong future trend. Not to mention more interest in pollution prevention. There is a lot of sifting to do, admittedly.
But your decision-making should also be guided by your own version of what is ‘ethical’. As we’ve tried to show, there are several versions!
Does the City ‘get’ green investing?
Yes, though it is an on-going journey. In January 2020 a letter from the head of the world’s biggest asset manager, Laurence Fink at BlackRock, sent a blunt message to the global financial community.
Fink said he was putting climate risk at the heart of BlackRock’s investment criteria: climate risk is investment risk he said.
His plain-speaking letter addressed basic human needs for shelter, food and long term planning. Will cities, he asked, be able to afford basic infrastructure needs if climate risk reshapes the money markets?
What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas?
Mr. Fink went on:
What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?
While climate change has become much more accepted – even fashionable – many ecologists are more worried by shrinking biodiversity, pesticide pollution, and habitat destruction. An area, not mainstream – yet.
Since 1970 humanity has wiped out 60% of mammals, birds, fish, and reptiles claim a Living Planet report by WWF.
Conclusion: long-term mentality change
Few people talked of ‘climate crisis’ back in the 1970s. Ecologists, mainly, talked of ‘global warming’. The views of a small but growing number of environmentalists were often disparaged. Their views are far more mainstream now.
But the biggest switch is how much attention sustainable investing now attracts. Millions worldwide are trying to work out how to manage the transition to a more sustainable economy. This sustainable economy is massive.
- Green investing stretches right across food, waste management, and battery science. It absorbs worries around increased urbanisation. Not to mention the need for reliable water supplies and lower-polluting EVs on our roads…
- …or the search for plastic substitutes – think algae insulation or urine bricks
- Investing here means involvement with the private sector and more opportunities to profit. Some of these new markets are complicated and prone to be misunderstood. There will be scaleability worries
- For fund managers, that’s a buying opportunity. It really is a new – and very exciting – investment world
What is green investing?
Green investing, is a form of socially responsible investing where investments are made in companies that support or provide environmentally friendly products and practices.
What are ethical investment funds?
An ethical investment fund aims to achieve positive returns for investors while effecting positive change for the environment. The choice of investments is influenced by a number of factors, and money is only invested in responsible companies that meet strict social, environmental and ethical criteria.
Is CSR the same as ESG?
In a nutshell, CSR represents a company's efforts to have a positive impact on its employees, consumers, the environment and the wider community. ESG, on the other hand, measures these activities to arrive at a more precise assessment of a company's actions.
Why is ESG important?
ESG factors are often used by investors who seek to reward and influence a company's long-term health. For many investors, understanding the ESG factors of a company helps them understand the corporate purpose, strategy, and general management quality.