rainforest animals

What is Green Investing?

Although green investing can be interpreted in different ways depending on an investor’s moral values and financial objectives, we define it loosely as follows:

Green investing is a process of making investment decisions based on environmentally conscious criteria with a purpose of:

* actively improving the health of the environment, and

* generating a certain amount of financial return on investments made.

The key point to keep in mind when discussing this area is that investors are all too aware of the environmental problems around the globe. They want to use their money to encourage the development of solutions to these problems.

In other words, environmental investors put their values at the front of their investment decision-making.

Yes indeed, values have recently become a new dimension of the investment universe. They are now driving the demand for a wider range of investment products which incorporate investors’ desire “to do well [financially] by doing good [ethically]”.

Making Sense of Terminology

green investing

If you want to try your hand at value-based investments, you can easily get lost in the sea of terminology and ambiguities surrounding this field.

Let’s try to make sense of the terms used.

Green investing is generally associated with the following commonly used terms:

  • Environmental Investing
  • Ethical Investing
  • Socially Responsible Investing (SRI), or simply Responsible Investing
  • Sustainable Investing

To understand what exactly these phrases mean, let’s introduce a concept of investment screening (or screens).

To construct portfolios of value-based investments, investment professionals use the processes of negative screening and positive screening.

Negative screening is used to sift out investments in sin industries, such as alcohol, tobacco, gambling, weapons manufacturing.

Conversely, positive screening is used to include good industries and companies; for example, “pollution solution” industry, or the companies which promote outstanding business and social practices such as fair trade operations.

There is a clear trend among investment professionals to use positive screening instead of simply avoiding the industries that their clients disagree with.

Getting back to our terms above.

Green investing applies positive screens to select industries and companies which are actively involved in solving environmental issues, rather than simply choosing environmentally neutral ones.

Among the most prominent industries here are:

  • Renewable Energy
  • Water Technology
  • Green Cars
  • Green Building
  • Energy Efficiency
  • Reforestation

We discuss green industries in more detail here.

Green investing is a “niche” opportunity which focuses on environmentally proactive sectors.

Environmental investing is its synonym and can be defined in the same way. We discuss environmental investing in more detail here.

Ethical investing, socially responsible investing and sustainable investing are wider concepts.

Ethical investing applies negative screens to eliminate “unethical” industries considered to cause harm to people and the environment. (1) Such industries may include alcohol, tobacco, gambling etc.

Socially responsible investing (SRI) uses both negative and positive screens to eliminate undesirable industries and include desirable ones (2), for example green industries discussed above.

However, recently there seems to be a progress towards interchangeable use of both terms, and ethical investing is often defined within the same boundaries as SRI (i.e., applying both positive and negative screens). (3)

It is interesting to note that many socially responsible mutual funds have policies of non-investment in animal testing companies.

This is crucially important as animal testing is just one of the causes of animal endangerment that may even lead to animal extinction.


Sustainable investing is a more recent concept, and its main difference from SRI appears to be its emphasis on companies of any sector which are “best of breed” (or “best of class”, or “best of sector”), i.e. the ones that best meet a defined set of environmental, social and governance criteria (ESG).

Theoretically sustainable investments can be made in any industry, but in practice many sustainable investment funds still apply traditional SRI exclusions although “values-based exclusions should be understood as additive or collateral to the primary financial focus” (4).

Since there are a lot of similarities between these two concepts, they are also often used interchangeably.

I have even stumbled upon a creative attempt to combine these two ideas into one definition.

Calvert Group provides the following definition:

SRI = Sustainable and Responsible Investing (5)

as compared to the historic definition of:

SRI = Socially Responsible Investing

So be it then!

Conclusion

We can see that green investing can be defined either as a separate value-based investment category; or as part of ethical, socially responsible or sustainable investing.

Already, there are many value-based investment products both in the US and internationally.

They offer a number of investment opportunities which investors can choose according to their own ethical and financial objectives.

For environmental investors, putting money into funds and companies with the environmental focus is, of course, the best way forward.


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