Businesses and consumers alike have an interest in easing the burden placed on the environment by investing in our planet through green initiatives. As the world’s population grows and traditional sources of fuel like coal, oil and natural gas become increasingly scarce or limited through government regulations, we must discover ways to invest in alternative energy sources. The good news is that solutions are becoming more affordable as new technologies are introduced. From an investment perspective, the global government policies underway to reduce emissions and promote healthy communities are ones that simply should not be ignored in your wealth-building portfolios. Eco-friendly investing, also called green investing, may enhance your wealth while benefiting the environment.
What Is Green Investing?
Green investing seeks to support business practices that have a favorable impact on the natural environment. Often grouped with socially responsible investing (SRI) or environmental, social and governance (ESG) criteria, green investments center around companies or projects committed to the conservation of natural resources, pollution reduction or other environmentally conscious business practices, according to Investopedia.
Previously considered a niche sector, green investing has grown along with increasing awareness of climate change. More and more people want to put their money behind companies and projects that help them build wealth and support personal values, including keeping our planet safe for future generations. The amount of new money investors added into open-end and exchange-traded funds reached over $70 billion in 2021, nearly a one-third increase over the previous year, according to a study by Morningstar.
Types of Green Investing
There are several ways to invest in green technology initiatives, as mentioned by SoFi. Investors can make green investments in the stocks and bonds of companies that promote positive environmental values or are involved in green industries. Green mutual funds and exchange-traded funds (EFTs) also provide a sustainable strategy for potential investments.
- Green equities and stocks: Purchasing stocks of companies with environmental commitments can be a great place to start green investing. Many firms and startups, whose shares can be bought and sold, are involved in green industries, such as alternative energies and materials. Some investors believe that companies focusing on green issues are more likely to be sustainable and profitable in the long term.
- Green bonds: Another route is to invest in green bonds, also known as climate bonds. The bonds of companies involved in green and environmentally friendly business practices can be a good option for investors interested in fixed-income securities. Additionally, government bonds to fund green-energy projects can be an option for fixed-income investors. These bonds may also come with tax incentives, making them more attractive than traditional bonds. According to the Climate Bonds Initiative, approximately $1.1 trillion in new green bonds were issued in 2021.
- Green mutual funds and EFTs: This option provides an alternative to selecting individual stocks by providing a broader exposure to green companies. These green funds invest in a basket of promising securities, allowing investors to diversify their holdings by investing in a range of projects rather than a single stock or bond.
Benefits of Green Investing
Investing in clean energy can be beneficial, not only for the environment but also for your financial portfolio. A study conducted by the International Energy Agency and Imperial College Business School’s Centre for Climate Finance & Investment reviewed the performance of renewable power and fossil-fuel portfolios in the United States over 5-year and 10-year periods. Over ten years, renewable energy outperformed fossil fuel, generating returns of 192.3% compared to 97.2%. In the past five years, renewable energy investment yielded higher returns and less volatility than the fossil-fuel portfolio. Here are a few reasons why:
- Investors benefit from green-fund resilience: Green-fund portfolios are more relatively diversified, while brown-fund portfolios tend to herd, or spread investments over a large number of the same companies. Climate-related financial shocks will disproportionately affect brown funds, even two to three times more than those in green funds, according to the World Economic Forum.
- Green funds bring lower systemic financial risk: Brown funds are more interconnected than green funds, meaning they also have a more significant systemic impact. They contribute more to total system-wide losses than green funds. Investors should assess investment funds not only in terms of their financial performance but also with respect to their vulnerability to climate-related risks.
- Green bonds offer similar yields, ratings and return profiles: Other fixed-income investments have about the same returns, but green bonds fund projects that make a measurable impact in the effort to address environmental challenges.
- Green bonds may provide a way to earn income exempt from taxes: According to Climate Bonds Initiative, bond investors do not have to pay federal income tax on the interest from some green bonds they hold, so the issuer can get a lower interest rate. This type of tax incentive is typically applied to municipal bonds in the United States market.
Considerations for Green Investing
Implementing a green investment strategy may be an excellent way to align some personal values and financial goals, but there are a few things to consider before getting started:
- The definition of green can vary from one investor to another: Some so-called green funds include companies that operate in the natural gas or oil sectors. Prospective investors should research their potential investments to verify whether the company fits their definition of green.
- Some funds may use greenwashing: Greenwashing refers to the practice of branding a company or product as environmentally friendly to capitalize on the growing demand for sustainability. While messages of green marketing are often sincere, some companies overstate their practices’ impact or downplay their products’ ecological costs. The only way to evaluate a fund’s true sustainability is to examine its assets and prospectus.
- Investing in green companies may pose a greater risk: Many green companies are still sitting in the development stage with low revenues and high earnings valuations. On the other hand, other investing strategies often invest in more established operations. However, if supporting eco-friendly businesses is essential to investors, green investing can still be a valuable way to put their money to work for the longer term.
- Keep long-term goals in mind: Green investments may not always be the most profitable in the short term, But they can provide other long-term benefits and help diversify your portfolio to minimize risk.
Growing Investment Opportunities
Hydrogen production is a growing investment opportunity. With the global government’s push for a net-zero emissions goal by 2050, hydrogen production is becoming more popular —and green hydrogen will be essential to meeting this goal. Check out our Future with Fortune video, in which Wealth Management Advisor David Freisner breaks down the current types of hydrogen production and the rapid advancements of green hydrogen.
We expect green hydrogen production to become less costly and more efficient over the next several years. It is currently in the infancy stage and is undergoing new developments regularly. As a result of both government and private funding, green hydrogen technologies are making rapid advancements. We will continue monitoring new developments in this space for potential investment opportunities.
Turn to the Experts at Fortune Financial
Our focus at Fortune Financial is on locating solid alternative investment opportunities so that our clients are not simply riding the emotional roller coaster of up-and-down market cycles. With more than 90% of the wealth in the United States outside the stock markets, these alternative investments can reduce volatility within your portfolio while also providing solid growth.
We offer the expertise and experience to identify stock market opportunities in traditional investments as well as the growing space of alternative investments. Please get in touch with a Fortune Financial Advisor to review your individual portfolio and start enhancing your wealth.
This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. Fortune Financial Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice. The information provided above is obtained from publicly available sources and is reliable. However, no representation or warranty is made as to its accuracy or completeness.