HOW TO DECIDE IF GREEN INVESTING IS RIGHT FOR YOU

If you are reading this, I am assuming you are already familiar with the concept of green investing. You may have heard of it by another name. It often falls under broader terms like ESG investing, SRI investing, or sustainable investing. While those concepts can encompass a few more things, they all focus pretty heavily on making sure your investments are environmentally responsible.

The reason I assume you have already heard of it, is simply because of the massive amount coverage this new investing category is getting. More and more people are getting onboard with the idea of filtering their portfolios for various social issues, and as they do the category continues to skyrocket in terms of its marketshare. To decide if green investing is right for you, we have to first start by talking about what ESG investing is. So let’s break it down by letter.

(E)nvironment

ESG investment funds start by looking at environmental factors. They can use filters like overall carbon emissions, total energy use or a myriad of other things. Most funds look to exclude companies that exceed a certain amount of emissions, or don’t get enough of their energy from renewable sources.

(S)ocial

This sections looks mainly at four main categories; Diversity, human rights, consumer protection, and animal welfare. So think things like the racial and gender representation on a board of directors, or policies to protect consumers and take care of problems. The more in depth fund go as far as to examine the full supply chain of the companies involved to see how their practices affect the communities in which they operate around the world.

(G)overnance

For this category think about management structure, and most importantly, employee relations. ESG companies are those that treat their employees well, both through compensation, benefit, and overall company culture. In addition to how the employees are treated, it’s important to look at how management treats itself. What was the executive pay in comparison to the average employee for instance.

Between those three areas the particular filters that a fund uses can be far and wide. One commonality that many ESG and SRI funds share however is they tend to operate on an exclusionary basis. What that means, is that fund managers will often start with a baseline fund, say the S&P 500 index. Then they will set up certain filters designed to weed out companies that don’t meet their standard in those areas.

What you end up with tends to look something like the original fund, but with a good chunk of companies missing from it that didn’t make the cut. While thats certainly not a bad policy, I personally don’t think it is the best.

Green Investing

So what makes green investing different? If most ESG funds already filter for environmental concerns that should be good enough right? The answer is… Maybe. It depends on how much you care about the E in relation to the other letters. Green investing is going to spend almost all of its time devoted to looking at the environmental data of the companies. The good news, is that if you still think the S and G are important, most of the companies who have the best E score, will also be pretty good citizens when it comes to the other two measures.

Green investing just gets a lot more focused than ESG does. ESG funds redesigned to set a few filters, and simply exclude the worst companies. But green investing, like our Green Series” is designed to find and invest in the greenest companies in each industry. Rather than being exclusionary, green investing is Inclusionary. We start from zero, and start adding companies based on which ones are the best, when it comes to environmental issues, not just removing the ones that are the worst.

In the end what you will be left with is a group of companies that aren’t just able to meet a certain requirement, they are truly the best of the best when it comes to taking care of our planet.

Is it Right For You?

In all fairness, only you can answer that question. But if you look at ESG investing and say something along the lines of “that’s a cool idea, but I care mostly about the environment”, or “I only want to invest in the greenest companies, not just the ones who aren’t the worst.”

There are also some risks to consider when it comes to ESG or green investing. Because the pool of companies included in the funds is smaller than if there were not environmental screens, they tend to be less diversified than traditional investment funds. We always recommend talking to a fee only financial advisor to determine if it is right for you.