Over the past decade, a revolution in investing has taken place. Instead of relying on conventional fundamentals and technicals, market participants have gravitated toward green investing strategies. What exactly is green investing? It is a method of investment management that values business practices that have a positive impact on the physical and social environment.
Green investing is often combined into a discipline known as ESG investing. When adhering to ESG, market participants favour non-financial factors when crafting decisions. ESG stands for environmental, social and governance—three elements of "socially responsible and sustainable investing (SRI)."
Accordingly, many traditional money managers have built ESG funds in the hopes of promoting things like clean energy, sustainability, climate change solutions and socially-oriented corporate governance. The biggest names in finance participate, including Blackrock, JP Morgan and Goldman Sachs. Among the key offerings are ESG exchange-traded funds (ETF), certain corporate shares and green investing portfolios.
What Is Green Investing?
Green investing is the allocation of capital to companies, funds and ETFs that focus upon ESG-oriented principles. The primary goal of green investing is to realise positive returns in a socially-responsible fashion.
There are several facets to green investing. One of the largest is pure-play green investments, which generate revenues solely from green business functions. Many of these offerings are focussed on the following sectors of green investing: energy, environmental preservation and recycling.
The production and cultivation of clean energy is a primary segment of green investing. At the core of this segment is the practice of directing capital from traditional fossil fuel companies to those that aim for a net zero distribution of carbon emissions. Green energy companies typically focus on solar energy, wind energy and the manufacture of biofuels.
These companies are examples of firms likely to be targeted by socially responsible investing practitioners. ESG strategies may choose to include such offerings because they target the reduction of greenhouse gas and positively impact climate change.
Green energy companies achieve socially responsible status by focussing operations on the reduction of carbon emissions, the development of renewable energy and implementing positive impact environmental business plans. Given the core business operations of these firms, they are ideal candidates for ethical investing pension funds.
Below are a few examples of prominent green energy companies.
Hannon Armstrong Sustainable Infrastructure Capital (HASI)
HASI is a firm that invests solely in climate solutions. It is traded on the New York Stock Exchange (NYSE) and holds a market capitalisation of US$3.982 billion (February, 2022). Key segments are energy efficiency, renewable energy and various sustainable infrastructure endeavours.
Sunrun Inc. (RUN)
Sunrun Inc. is a firm that specialises in the provision of solar energy solutions. Core businesses include home solar, battery storage and commercial solar offerings. Shares of Sunrun Inc. are traded on the NASDAQ under the symbol RUN. As of February 2022, Sunrun held a market capitalisation north of US$5.135 billion.
Tesla is a household name in the electric vehicle (EV) and clean energy sectors. Headed by CEO Elon Musk, Tesla is a major player in the EV space. Shares of Tesla are traded on the NASDAQ exchange under the symbol TSLA. As of February 2022, TSLA held a market capitalisation of US$813.32 billion.
Infineon Technologies (IFNNY)
Infineon is a leading provider of semiconductors to the manufacture and production of EVs. In addition, Infineon's products are used in the wind and solar energy sectors. Commons stock shares of IFNNY are traded in an over-the-counter (OTC) capacity. As of February 2022, IFNNY held a market cap of US$46.021 billion.
The role of climate change in global politics, business and commerce has expanded exponentially. In fact, many people factor in a company's views towards the environment when making investment decisions. Often, a corporate prospectus will spell out exactly what a firm does on a day to day basis to limit their environmental impact.
Each of these funds are considered sustainable funds as they promote the values of environmental and societal awareness. One of the vital tenets of such investment funds is the concept of climate risk and limiting the potential fallout from climate change. Through backing firms that practice limited habitat impact businesses, each of these offerings promotes ESG and attempts to foster sustainable industry.
One of the largest challenges that SRI and ESG investors have is greenwashing. Greenwashing occurs when a company says that they are environmentally conscious for marketing purposes while actually ignoring sustainability values. Greenwashing is conducted in many formats, including television, radio and social media disclosures. These campaigns can confuse ESG investors and fund managers, which may mistakenly invest in corporations that aren't SRI oriented.
From a climate change perspective, fund managers often make investment decisions with a goal of preserving the longevity of the physical environment. According to Morningstar research, the following funds are leaders in the ESG space.
Parnassus Mid Cap (PFPMX)
Parnassus has been a leader in ESG investing since the mid-1980s. Their fund managers make ESG investment decisions by filtering out companies that engage in controversial business practices and aligning investment alternatives according to the ESG core values. For any shareholder of Parnassus Mid Cap, socially responsible portfolio holdings are assured.
Pax Global Opportunities (PXGOX)
The team at PAX balances a rigid ESG approach with a technically savvy stock selection process. A few of the parameters for asset allocation include sectoral and regional exposure. For instance, mining and fossil fuel companies are not favoured among PAX's ESG asset management approach.
TIAA-Cref Core Impact Bond (TSBIX)
A team of ESG fund managers runs the TIAA-Cref Core Impact Bond. As in the name, this group of mutual funds specialises in impact investing. In this investment strategy, the fund targets companies that can generate financial returns while having a positive social or environmental influence.
One key component of the green energy space is recycling. Recycling is the remanufacture of previously used goods for future consumption. For instance, aluminium, iron, cardboard and plastics are frequently recycled in the spirit of sustainability. Many individual investors allocate their capital to recycling oriented companies in an attempt to satisfy their ESG and SRI objectives. It's not uncommon to see individuals include such companies in their ESG retirement plans.
Under the slogan "reduce, reuse, recycle," here are a few of the world's largest recycling companies.
Waste Management Inc. (WM)
Waste Management Inc. is based out of Houston, Texas USA. WM specialises in the provision of environmental solutions for residential, commercial and various industries. A few of the firm's key segments are electronic recycling, waste conversion and single-stream recycling. Shares of WM are listed for trade on the New York Stock Exchange (NYSE). As of February 2022, WM held a market capitalisation of US$60.182 billion on 414.59 million shares outstanding.
Veolia Environmental Services
Veolia Environmental Services is a privately held recycler based in Paris, France. The company provides services in the management, treatment, disposal and reclamation of waste products. Veolia is a true multinational conglomerate with a presence in countries around the world and 179,000 workers.
Republic Services Inc. (RSG)
Republic Services is headquartered in Arizona, USA. Republic specialises in e-cycling and non-hazardous waste disposal. Also, the company maintains a collection of charitable fiduciary responsibilities. Shares of RSG are listed for trade on the NYSE. As of February 2022, RSG held a market cap of US$38.253 billion on 316.43 million shares outstanding.
Waste Connections Inc. (WCN)
Waste Connections is headquartered in Woodlands, Texas (USA) and Ontario, Canada. The firm is North America's third-largest waste management company behind WM and Republic. Waste Connections focusses operations on commercial recycling, paper shredding, yard waste removal and residential garbage collection. Shares of WCN are listed for public trade on the NYSE. At press time, WCN held a market cap of US$31.911 billion on 257.33 million shares outstanding.
Clean Harbors Inc. (CLH)
Based in Norwell, U.K., Clean Harbors executes the packaging, recycling, collection, transportation and disposal of waste. The company also provides cleaning services, reducing the impact of polluters. Shares of Clean Harbors are listed for trade on the NYSE under the symbol CLH. As of February 2022, CLH held a market cap of US$5.276 billion on 54.41 million shares outstanding.
Green, SRI and ESG investing are all disciplines designed to promote ethical business practices and portfolio management. ESG and green investing go hand in hand as issues such as carbon emissions, air/water pollution and waste management are of paramount importance.
Under the moniker "sustainable investing," ESG and green investing has grown in popularity over the years. Now, there are hundreds of such stock offerings, ETFs and index funds to choose from. In fact, the US stock market regulator the Securities and Exchange Commission (SEC) has made climate risk a priority for equity listings. To do so, the SEC released an Investor Bulletin in late-2021 that formally addressed ESG index and mutual funds. In the bulletin, the SEC breaks down what ESG offerings are and how the public may safely invest in them.
Ultimately, it's up to the individual investor to decide whether or not to participate in green investing. Like all other modes of capital investiture, ESG, SRI and green investing all have a degree of risk. For instance, during the COVID-19 pandemic of 2020/21, many ESG assets exhibited enhanced volatility. At the end of the day, the responsibility of determining whether or not ESG assets are a suitable financial avenue falls upon each investor.
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