What is a green investment? And should you consider them for your portfolio?

Stocks, exchange-traded funds (ETFs), mutual funds and more may be considered green investments if their underlying businesses are, in some way, involved in operations aimed at bettering the environment.

Presently, the definition is broad enough that companies offering ‘green investments’ can range from fully sustainable enterprises and those developing alternative energy technologies to businesses simply employing a few environmentally-conscious work practices.

The interpretation of what constitutes a green investment is ever-changing and, for better or worse, are often determined by attractive marketing campaigns and consumer sentiment.

To avoid the noise and pretenders that are hoping to piggyback the latest trends and progressive concepts, you’ll have to dig deeper than a few upbeat press releases claiming an environmentally-friendly business agenda. Do your research to uncover a business’ prospectus, policies and performance as it pertains to sustainability.

Green investments aren’t necessarily cheaper or vastly different to traditional investments. They are essentially offering an eco-friendly alternative that may incentivise other traders and companies to support their cause.

Let’s get specific

An International Monetary Fund (IMF) working paper outlining sustainability trends refers to green investment as, “the investment necessary to reduce greenhouse gas and air pollutant emissions, without significantly reducing the production and consumption of non-energy goods”.

In a separate paper entitled, Defining and Measuring Green Investments, the Organisation for Economic Co-operation and Development (OECD) asserts that the IMF’s definition covers both public and private investment, and that there are three main components of green investment:

• Low-emission energy supply (including renewable energy, biofuels and nuclear)
• Energy efficiency (in energy supply and energy-consuming sectors)
• Carbon capture and sequestration (including deforestation and agriculture)

How then do investment managers allocate assets as green investments? Over the years, a number of different approaches have been developed, according to the OECD. Primary deciding factors include:

• Negative screening and exclusion of undesirable products (e.g. palm oil) or sectors (e.g. the arms industry)
• Positive screening or selection of assets (e.g. with the help of filters)
• Investment in “green themes”
• Engagement, activism, voting (to make companies greener)
• Integration of green / ESG factors in general investment analysis

However, institutional investors use a multitude of approaches both at the macro and micro level of decision-making to determine the eco-eligibility of assets.

“It is therefore unlikely to find agreement on a meaningful, exact operational definition of green or climate change investment,” according to the OECD’s report.

One of Australia’s Big Four banks, Commonwealth Bank, suggests green investments are decided on an individual basis: ‘Ethical’ or ‘responsible’ investing can be described as not just seeking positive financial returns, but also ensuring that those returns are generated in a way that is consistent with your personal beliefs and values.

How to acquire green investments

There are a variety of ways to make ethical or sustainable investments. You can make inquiries with your superannuation fund to see if they invest in any green assets and prioritise these within your portfolio.

Consulting a financial advisor may assist you in discovering green investment approaches and opportunities. These experts can help you to screen potential investments, allowing you to make more ethically-focused decisions.

Deciding which companies to avoid when seeking green investments (i.e. oil and coal producers) is likely to be easier than determining those that engage in genuine environmentally-friendly practices. Consulting a company’s prospectus and public filings can be a useful source of information but there are a number of corporate and social governance issues, critical to a businesses’ enduring value, that don’t show up on financial statements.

Index providers such as Dow Jones and MSCI build indices that list companies that pass purportedly rigorous sustainability evaluations based on Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) practices. These indices can provide guidance for those interested in green investments.

These assessed products are still subjective, as different people have different ethics and standards. Therefore, personal judgement is still required when considering any investment strategy.

The rules you apply to ordinary investing also apply to green investments. Consider your risk strategy, portfolio diversity, investing amounts and time frames, safety and security, returns expectations and more.

Whether you’re looking to make your first investment or considering expanding your portfolio, two of the most recommended investment options in Australia are property and shares. Both have their advantages and risks, and it’s worth comparing your options to determine which one to invest your hard-earned cash in.

Named after what are generally the most expensive poker chips in a casino, blue chip stocks are generally thought of as some of the top options for investors to consider. Find out what gives a share “blue chip” status.

Traditionally, investments have been a tool for the wealthy. They’re often complex arrangements that require a significant level of financing and incur high fees. However, the advent of micro-investing means you can dip your toes into this arena without excessive exposure.