Talking about investing in a greener world might be the most interesting issue for those who are keeping abreast with the modern world these days. This year, we’ve seen very hot weather, big storms, and wildfires. Many people in the US say they’ve been affected by extreme weather lately, and most think it’s because of climate change. Because of these dangers, more and more people are investing their money in things that try to fight global warming and help the environment. They want to save the planet and make some money at the same time.
This kind of investing is called green investing, and it’s part of a bigger trend. People are starting to think about things other than just making money when they decide where to put their money. This includes things like which funds to choose for your 401(k), where you bank, and which brands you buy.
There’s a special way to do this kind of investing, and it’s called ESG (Environmental, Social, and Governance).
ESG looks at three things: the environment, how a company treats people, and how it’s run. A lot of money, about $8.4 trillion, is now in ESG investments, which is about 12.6 per cent of all the money invested in the US In simpler terms, one out of every eight dollars is in an ESG investment fund. People are choosing to invest in a way that supports the planet because they already make choices to buy things like fuel-efficient cars and organic food.
The financial industry is making new funds and investments for people who want to invest in a way that helps the planet. Some of these focus on the climate. There are hundreds of these funds, and their names can be confusing. This makes it hard for regular people to choose.
So, before you put your money into a green or sustainable fund, it’s important to know what it does. Just having the word ‘green’ on it doesn’t tell you how it works. There are many different ways to do this kind of investing, and the people who run the funds might have a different idea of what ‘green’ means. This can be less ‘green’ than you hoped. Also, the money you make from these investments can be very different.
Jay Lipman, who works with people on sustainable investing, says there are so many choices that it’s up to the consumer to figure out which ones are good. You need to be like a specialist to see if these products really do what they say.”
“Don’t worry; finding the right green investment doesn’t have to be hard. You want to pick an option that fits what you care about, has done well in the past, and seems promising for the future, so you can make money, which is why you invest in the first place. Here’s how you can do it.
UNDERSTAND YOUR PRIORITIES
To start with green investing, you should first figure out which environmental issues matter most to you. That’s what Marguerite Cheng, a money expert, suggests. She says, “No investment will be perfect, so you should think about what matters most to you.” Think about the environmental issues that are most important to you and how you want to invest in them. Do you just want to avoid companies that harm the environment, like those that dig up fossil fuels or make pollution? Or do you want to invest in a fund that focuses on specific green goals, like capturing carbon or using clean energy? Maybe you prefer a broad fund that includes environmental concerns as part of its overall plan. Also, consider how much of your savings you want to invest this way and how these investments fit with your other financial plans. Some green funds mix different types of stocks or even bonds and cash to balance risk and return. Others focus on specific green goals with fewer stocks. This can be riskier, but it might bring bigger gains or losses and a more targeted way to invest in climate solutions.
EXPLORE YOUR CHOICES
Once you know your goals, you can start looking at the available funds to find a good match. The good news is it’s now easier than ever to follow a green investing plan because there are many funds and ETFs to choose from, often at a low cost. The bad news is that there are so many options it can be overwhelming. In the middle of the year, there were over 650 green investing funds and ETFs (Exchange Traded Funds) in the US, which is 11 per cent more than at the beginning of the year, according to a research company called Morningstar.
On one side, some funds follow a standard investing plan. They might have big US companies from various industries in their portfolios, along with foreign stocks and bonds, but they pick these companies with environmental, social, and governance (ESG) rules to avoid businesses that harm the environment. On the other side, there are about 100 funds that focus on specific areas, like reducing greenhouse gas emissions or creating new sustainability technologies.”
“What kind of money can you make with sustainable investing? Some ESG funds, which are like regular funds but with a green twist, might give you returns similar to regular funds. These funds hold many of the same good stocks as normal funds in their category. But, if a fund avoids certain types of stocks, it might do things differently. If it leaves out a lot of sectors, you could see bigger differences compared to regular funds.
In fact, most ESG funds made less money than normal funds last year. One reason is they didn’t have as many shares of big winners as energy companies that make fossil fuels. However, if you look at the last three to five years, green funds did better than regular ones, according to Morningstar data. Lately, they’re doing well too. The S&P 500 ESG Index has made a total return of 13.4 per cent this year until 20 October, while the regular S&P 500 made 11.5 per cent.
BE CAREFUL ABOUT GREENWASHING
If you want to invest in companies that help the environment, it can be tough to know if a fund is really doing what it says. Some funds say they’re green but might not be completely green. That’s because, under rules from the SEC (Securities and Exchange Commission in The US), a fund must invest at least 80 per cent of its money the way it promised. But the other 20 per cent can be different. This rule doesn’t specifically cover ESG themes, like being fossil fuel-free. So, a sustainable fund might have some not-so-green companies in its portfolio, which might upset investors who care about the environment.
For example, there’s the BlackRock US Carbon Transition Readiness ETF. It looks for companies that will do well as we use less carbon. But, besides Tesla, the fund mostly invests in big tech and consumer companies like Apple, Amazon, and MasterCard, which don’t have a direct link to fighting climate change. Plus, eight per cent of the fund is in oil and gas companies like Chevron and ConocoPhillips. This earned the fund a “D” in the fossil fuel category from As You Sow, a group that rates ESG funds.
There’s some good news. The SEC, which makes the rules for investing, is making things clearer. They updated the rules about fund names, so funds have to follow their promises more closely. ESG funds, in particular, have to stick to their promises better. They also have to explain their plans in simpler words. Funds have a few years to make these changes.”
If you want to try sustainable investing, you don’t have to put all your money in right away. You can begin by investing a small part of your savings in a sustainable stock fund that holds many different kinds of companies. It’s a good idea to start with an ESG index fund or an actively managed fund that follows a similar strategy.
These kinds of funds are usually the first ones made for ESG investing. You might already have one in your 401(k) plan. The good thing is that these funds usually have low fees, so you won’t lose much of your money to charges.
These funds avoid certain types of stocks based on different ESG issues, like climate concerns such as fossil fuels, as well as other industries that socially conscious investors prefer to stay away from, like weapons and tobacco.
Some funds track a broad ESG index, which is like a group of stocks from companies that do well in environmental and social areas. An example is the Vanguard FTSE Social Index Fund, which follows the FTSE4Good US Select benchmark and has a low management fee of 0.14 per cent — only $1.40 for every $1,000 you invest.
You might not find a fund that only focuses on climate goals, like reducing carbon emissions, in your 401(k) choices. But you can use a brokerage window if your plan offers it, or you can invest in green funds or stocks by yourself using an individual account with most fund companies or brokerage firms.
WHERE TO GET HELP WITH GREEN INVESTING
You can find many online resources to guide you in sustainable investing based on what you need.
Learn More To understand ESG investing better, you can visit ussif.org and go to the education section to find helpful guides. You can even take a free 30-minute online course.
If you want to research specific funds, you can use FossilFree-Funds.org, a free tool from the nonprofit group As You Sow. It rates around 4,500 US funds and ETFs according to their investments in various categories, such as avoiding fossil fuels or deforestation, and their performance on governance and social goals.
You can also try Morningstar’s ESG screener tool at Morningstar.com/esg-screener. It helps you sort funds by their sustainability ratings and other criteria. For more detailed fund data, you can sign up for a seven-day free trial, which costs $249 annually.”
If you need professional advice for your investments, you have a few options. You can use a robo-adviser, like Betterment.com, to create an ESG investment plan. They offer three ready-made ESG portfolios, and the fees start at $4 per month or 0.25 per cent of the amount you invest each year. For more personalized help, you can hire a certified financial planner who knows about ESG investing. You can find one at XYPlanningNetwork.com or GarrettPlanningNetwork.com. Some might charge a flat fee or an hourly rate.
CHOOSE GREENER INVESTMENTS
If you want to be more committed to green investing, you can pick funds that have stricter sustainability rules. However, these rules can be different between funds and the indexes they follow. To understand a fund’s strategy, you can look at the stocks it owns to see if they match your idea of green investing. Be sure to keep an eye on any changes they make. You can find this information on the company’s website or by checking the fund’s summary and top holdings on Morningstar.com.
For example, the Parnassus Core Equity fund is highly rated for sustainability by Morningstar. However, it recently decided not to avoid nuclear energy anymore, as it now sees it as a helpful source of energy during the transition to renewable energy. They don’t have nuclear energy stocks right now, and they mostly invest in big companies like Microsoft, Alphabet, and MasterCard, which have low carbon footprints. This fund has made an average of 10.5 per cent each year for the last five years. If you want to be even more focused on sustainability, you can invest in funds that aim to achieve specific goals. For instance, the Fidelity Water Sustainability Fund is dedicated to protecting clean drinking water and has investments in companies like Pentair and Tetra Tech, which work on water-related projects. If you’re interested in fuel cell technology, there are options like the Global X Hydrogen ETF, which has a major stake in Bloom Energy, a fuel cell maker. To be cautious, most impact investors should put no more than 15 per cent of their investments into narrowly focused green funds, advises Achtermann.
No matter which green investment strategy you choose, by picking funds that match your goals, you can make money while also supporting your values. As Cliff Feigenbaum, the founder of GreenMoney.com, says, “Investing in responsible companies just makes sense and helps create the kind of world we want to live in.”
Reference: Newsweek Nov 2023