What is Green Investing?

Green investing seeks to support business practices that have a favorable impact on the natural environment. Often grouped together with socially responsible investing (SRI) or environmental, social, and governance (ESG) criteria, green investments focus on companies or projects committed to the conservation of natural resources, pollution reduction, or other environmentally-conscious business practices. Green investments may fit under the umbrella of SRI, but they are more specific.

Pure-play green investments are those that derive all or most of their revenues and profits from green business activities. Green investments can also refer to companies that have other lines of business but focus on green-based initiatives or product lines.

There are many potential avenues for businesses seeking to improve the environment. Some green companies are engaged in renewable energy research, or developing eco-friendly alternatives to plastics and other materials. Others may seek to reduce the pollution or other environmental impacts from their production lines.

Because there is no firm definition of the word "green," what qualifies as a green investment is open to dispute. Some investors want only pure-play options like renewable fuels and energy-saving technology. Other investors put money behind companies that have good business practices in how they use natural resources and manage waste but also draw their revenue from multiple sources.

There are several ways to bet on green technology initiatives. While once considered a risky investment, some green technologies have been able to return strong profits to their investors. Perhaps the simplest form of green investing is to buy stock in companies with strong environmental commitments. Many new start-ups are seeking to develop alternative energies and materials, and even traditional players are making sizable bets on a low-carbon future. Some companies, such as Tesla, have been able to reach multi-billion dollar valuations by targeting environmentally-conscious consumers. A second route is to invest in green bonds. Sometimes known as climate bonds, these fixed-income securities represent loans to help banks, companies, and government bodies finance projects with a positive impact on the environment. According to the Climate Bonds Initiative, nearly $270 billion of green bonds were issued in 2020.

These bonds may also come with tax incentives, making them a more attractive investment than traditional bonds. Once considered a niche sector, green investing has swelled after a number of natural disasters brought attention to the oncoming climate crisis. The amount of new money in ESG funds reached $51 billion in 2020, more than double the figure of the previous year.

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