Broker Check
The Basics of Green Investing

The Basics of Green Investing

| May 31, 2023

Nowadays, many people consider investing to be about more than just money. As consumers become increasingly concerned about rising fuel costs, extreme weather conditions, and peaking home energy demands, they’re putting more thought into who they invest funds with and how their money is being used. And more frequently, that means choosing to collect dividends solely from responsible organizations.

Enter green investing, a new approach to financial strategy that considers the environmental impact of how people invest. This doesn’t just mean selecting a financial advisor or strategist with eco-friendly intentions; it means being directly involved in selecting where you buy investments like stocks, limiting your portfolio to companies that partake in or partner with green initiatives.

What it means to be “green”

Green investment strategies support businesses that aim to do any combination of the following:

  • Conserve natural resources
  • Reduce pollution
  • Source goods from sustainable farms or production facilities
  • Donate to or volunteer for environmental charities
  • Engage in environmental research projects
  • Participate in programs like the World Health Organization’s Green Initiative that set global environmentally friendly standards

Of course, there are various other ways businesses can be “green”. It also isn’t a regulated term, which means any organization can label themselves as green regardless of their practices, and not all are quite so boastful about their eco-friendly choices. For these reasons, it’s a good idea to do independent research about companies and assess their green initiatives before deciding to invest in them.

Why money is greener than ever

When purchasing bonds, funds, or stock in a public company, choosing green companies isn’t just environmentally conscious—it’s also profitable. Despite common concerns, green investing doesn’t have to compromise dividends, even if it does limit the pool of promising companies you can choose from. Morningstar Inc., an investment research firm that reviews market performance data, reported record-breaking performance and reduced risk from sustainable investments in 2022, proving that these financial efforts are particularly savvy—even for those who aren’t actively eco-conscious.


Investment Options

Green equities
There are many different options for investing in green businesses. The easiest one is to purchase equity (partial business ownership) in the form of stock shares. There are many ways you can go about this. First, you can work with a financial advisor who may know of and readily identify green companies that may interest you. They can then help you determine which securities, or units of investment, would be wise for your current financial status and goals. This will largely depend on your level of risk tolerance, which is how much money you’re willing to wager in order to potentially build returns.

However, many people choose to do their own research and invest in these companies independently, buying shares that suit their investment budget without the help of a financial advisor. This could be a smart idea if you’re investing in a small pool of organizations, but buying and managing these securities may be too complex for those without a background in investment finance.

Green bonds
Another investment option is to purchase bonds, which are essentially loans you give to a company. Green bonds fund banks, government organizations, and other bodies to pursue environmentally friendly initiatives. These are often referred to as “climate bonds” because they directly fund projects like climate research. Best of all, these bonds may offer tax incentives due to their green benefits, similar to the tax breaks you may be eligible for if you install high-efficiency home appliances or switch to an electric vehicle.

While buying bonds doesn’t grant you partial ownership of a company (as stocks do), many people prefer to invest in bonds because they tend to be lower risk. Bonds also offer a fixed income in the form of regular interest payments; that means you continue to make money off of them so long as the organization can continue to pay interest on the “loan” that you issued them in the form of a bond. Stocks, meanwhile, must be sold to another shareholder at a higher price than your initial investment in order to earn you a profit. People with environmental concerns may prefer bonds for this reason, not just because of the rolling income but also because they allow you to remain in business with a green organization and continue supporting them.

Green funds
You can also choose to purchase shares in mutual, index, or exchange-traded funds (ETFs). These are essentially collections of securities that allow green investors to appropriate their funds among a variety of companies and organizations in one cohesive portfolio.

This may be the greatest option for those looking for an entry point to green investing. There are many popular and successful green mutual funds on the market that investors can easily buy portfolios from. Consider searching for a fund that aligns with your particular environmental concerns, such as clean wind or solar energy production. Environmental, social, and governance (ESG) mutual funds, for example, only invest in companies that do not own any fossil fuel reserves. Investing in a green fund can be a source of excellent returns—as well as the personal satisfaction that you are helping organizations make a positive environmental impact.


Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.  All indexes are unmanaged and cannot be invested into directly.

Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Investing in mutual funds involves risk, including possible loss of principal.  The funds value will fluctuate with market conditions and may not achieve its investment objective. Upon redemption, the value of fund shares may be worth more or less than their original cost.

An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This article was prepared by ReminderMedia.

LPL Tracking #1-05366689