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Understanding Socially Responsible Investment (SRI)
By JAMES CHEN Updated September 12, 2021 Investopedia.com
Socially responsible investments include eschewing investments in fossil fuels, nuclear weapons, and companies that produce plastics or sell addictive substances (like alcohol, gambling, and tobacco) in favor of seeking out companies that are engaged in social justice, and environmental sustainability using renewable energy.
In recent history, “socially conscious" investing has been growing into a widely-followed practice, as there are dozens of new funds and pooled investment vehcles available for retail investors. Mutual funds and Exchange traded funds (ETFs) provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment. However, investors should read carefully through fund prospectuses in order to determine the exact philosophies being employed by fund managers, along with the potential profitability of these investments. An investor must still assess the financial outlook of the investment while trying to gauge its social value.
Environmental, Social, and Corporate Governance (ESG) is an evaluation of a firm’s collective conscientiousness for social and environmental factors. It is typically a score that is compiled from data collected surrounding specific metrics related to intangible assets within the enterprise. It could be considered a form of corporate social credit score. Research shows that such intangible assets comprise an increasing percentage of future enterprise value. While there are many ways to think of intangible asset metrics, these three central factors together, ESG, comprise a label that has been adopted throughout the United States financial industry. They are used for a myriad of specific purposes with the ultimate objective of measuring elements related to sustainability and societal impact of a company or business.
Understanding Green Investing
Pure-play green investments are those that derive all or most of their revenues and profits from green business activities. Green investments can also refer to companies that have other lines of business but focus on green-based initiatives or product lines.
There are many potential avenues for businesses seeking to improve the environment. Some green companies are engaged in renewable energy research, or developing eco-friendly alternatives to plastics and other materials. Others may seek to reduce the pollution or other environmental impacts from their production lines.
Because there is no firm definition of the word "green," what qualifies as a green investment is open to dispute. Some investors want only pure-play options like renewable fuels and energy-saving technology. Other investors put money behind companies that have good business practices in how they use natural resources and manage waste but also draw their revenue from multiple sources.
Green Investing vs. Greenwashing
"Greenwashing" refers to the practice of branding a company or product as "environmentally friendly" in order to capitalize on the growing demand for sustainability. While green marketing is often sincere, many companies have overstated the impact of their environmental practices or downplayed the ecological costs of their products.
For example, some companies have overstated their usage of recycled materials, leading consumers to mistakenly believe that their products were more sustainable.5 Many companies purchase carbon offsets to reduce their footprints, although this is difficult to verify the true cost of a company's emissions. In a more egregious case, IKEA was accused of using illegally sourced timber for some of its furniture products. To make matters worse, the timber had been verified by the Forest Stewardship Council, raising ethical questions about the business model of pay-for-play green labeling.6
In the securities world, some managed funds have attempted to greenwash themselves by rebranding in a way that suggests a greater level of sustainability. The only way to evaluate a fund's sustainability is to examine its assets.
Are Green Investments Profitable?
While profit is not the only goal of green investing, there is evidence that environmentally friendly investments can match or beat the profits of more traditional assets. A 2020 study by Morningstar, Inc. found that there is "no performance trade-off" between environmentally sustainable funds and the wider market. The study also found that "a majority of sustainable funds have outperformed their traditional peers over multiple time horizons."4
How Do You Tell if a Green Fund Is Sustainable?
Each fund holds a basket of securities, representing a cross-section of a larger part of the market. In order to determine if a "green fund" is sufficiently sustainable, prospective investors should first examine the securities listed in the fund's assets. In addition, some research firms may offer independent evaluations, such as Morningstar's sustainability rating or State Street's R-Factor.
Researching Information into Green funds
"Clean 200", the AS YOU SOW web site and search engine on funds.
List the US /SIF -- The Forum for Sustainable and Responsible Investment list of funds. Perhaps add the Sierra Club funds. The lay person needs info to assist personal change and or to present to their financial advisor. These "Tools" need HIGH visibility in green section.
Click here for a report on the Clean 200 companies for the climate.
Types of Green Investing
There are several ways to bet on green technology initiatives. While once considered a risky investment, some green technologies have been able to return strong profits to their investors.
A Green Bank is a publicly capitalized entity established specifically to facilitate private investment into domestic low carbon, climate resilient (LCR) infrastructure and other green sectors such as water and waste management. These dedicated green investment entities have been established in California, Connecticut, Hawaii, New Jersey, New York and Rhode Island in the United States), and county level (Montgomery County, Maryland, United States).
Green Banks and Green Bank-like entities have diverse rationales and goals, including meeting ambitious emissions targets, mobilizing private capital, lowering the cost of capital, lowering energy costs, developing green technology markets, supporting local community development and creating jobs. These goals are reflected in the range of metrics Green Banks use to measure and track their performance and demonstrate accountability: emissions saved, job creation, leverage ratios (i.e. private investment mobilized per unit of GIB public spending) and, in some cases, rate of return.
BankFWD is a network of individuals and organizations united in the belief that by using our collective wealth and public standing, we can persuade major banks to lead on climate by phasing out financing for fossil fuels.
We have the power to change our banking system because it will not change itself. Mass pressure from customers will force our banks to defund fossil fuels.
Another route is to invest in shares of a mutual fund, ETF, or index fund that provides wider exposure to green companies. These green funds invest in a basket of promising securities, allowing investors to spread their money on a diversified range of environmental projects rather than a single stock or bond.
The definition of "green" may vary from one investor to another. Some so-called "green" funds include companies that operate in the natural gas or oil sectors. Although these companies may also be researching renewable energy technology, some investors might hesitate to invest in a fund associated with fossil fuel companies. Prospective investors should research their investments (by checking out a fund's prospectus or a stock's annual filings) to see if the company fits their definition of "green."
Some green funds may also invest in more traditional companies, such as General Motors, Toyota, or even Exxon Mobil. Environmentally-conscious investors should be careful to check a fund's prospectus to decide if it fits their definition of "green."
Perhaps the simplest form of green investing is to buy stock in companies with strong environmental commitments. Many new start-ups are seeking to develop alternative energies and materials, and even traditional players are making sizable bets on a low-carbon future.
Click here on more equity info
Green bonds can be bonds issued by municipalities to improve water facilities or reduce energy costs, corporations to finance green projects. One can purchase individual bonds or a fund that contains only green bonds.
Click here for information on Green Bonds.
Green Mutual Funds
Green mutual funds include the
TIAA-CREF Social Choice Equity Fund (TICRX);
Portfolio 21 Global Equity Fund Class R (PORTX); and the
Green Century Balanced Fund (GCBLX).2
There are also several indexes that seek to track environmentally favorable businesses.
For example, the NASDAQ Clean Edge Green Energy Index and the MAC Global Solar Energy Index both target the renewable energy industries.
Funds that follow these indexes invest in renewable energy companies, allowing investors to support the new technology while earning a potential profit.