Green investing is a category of investing where people choose to invest their money in ways that support environmentally friendly businesses and initiatives or protect and conserve natural resources. They can include alternative energy sources (such as solar or wind power), energy efficiency projects, or environmentally sustainable companies.
As a concept, green investing has gotten an unfair reputation over the years. People tend to associate any type of ethical investing with low returns. That attitude is changing though, as people are realizing the power of their investment dollars, and new ethical investing opportunities are offered.
Ultimately, how you invest your money is a matter of choice. If you choose to invest your money in ways that support improving the environment, here are a few important things to remember:
- Your money can have a real impact: It’s easy to feel like your individual choices can’t change the world, but in reality, the opposite is true – especially if you combine your investment funds with other people who share your interests. One way to do this is with investments such as community bonds. Organizations such as CoPower and SolarShare have raised millions of dollars to fund energy efficiency, clean power generation, and other projects. These community bonds are secured by real assets, and pay a reasonable rate of return. Other options include services like Wealthsimple, which allow you to invest in ethical portfolios, such as a selection of companies with low carbon emissions (check out our review of Wealthsimple here).
The challenge with this is that while your money can have a real impact, you need to make sure that it does. Some “green” products and investments only offer lip service to actual environmentally friendly outcomes. Researching the impact your investment will have is a key first step to choosing where you want to invest.
- Make sure you have a realistic expectation for your investment income: When it comes to green investments, there is a “Goldilocks zone” when it comes to your investment return. While your money has the capability to help make the world a better place, it should also be making you money at the same time. This is important, because like any investment option, green investments come with an element of risk. Along with that potential risk there should be a reasonable expected return.
What’s a reasonable rate of return for a green investment? In order to get some context on that question, we reached out to Tim Nash, blogger at The Sustainable Economist:
“When it comes to the return, there are really two very different types of green investments. On the lower-risk side (such as solar bonds or green bonds) the benchmark range is 5% a year. If you’re willing to take a little more risk, you can get into high-dividend paying stocks (such as Brookfield Renewable Partners – BEP.UN) which pays 6.27% annually in dividends, but it does come with some volatility and that share price can go up and down.
From there it jumps up super high, the ETF PZD (an Invesco Cleantech ETF) the average returns over the last few years are in the 10-15% ballpark, but that has obviously been in a very good stock market time. Because this is higher risk, in a crash I would expect this to fall further than other stocks. This is on the high-risk, high-return side. With big risk can come 10-15% annual return, but you really are riding a roller coaster so that only really makes sense if you’re in it for the long term.”
As you can see, green investing doesn’t have to come at the cost of your investment return. If you’re only going to earn GIC interest rates for your money, it should be because that money is guaranteed like a GIC.
It is also important to remember that rates of return for green investments should not be unrealistically high. An excessively high projected rate of return on an investment can be a red flag warning you of problems or potentially excessive risk.
Regardless of the rate of return, it is always a good idea to do your due diligence. Be sure to investigate any investment you undertake.
- Invest based on business plans, not politics: As recent political changes in Ontario have shown, political support for green power and other projects can come and go. This is a risk that all investors should be aware of, but it doesn’t mean that the time for green investing has come and gone. Often, the best potential green investments are ones with a strong business case that doesn’t depend on politics as all.
A great example of this are the projects that CoPower undertakes. They state that their plan is to invest in “clean energy projects and energy efficiency projects that reduce carbon and generate steady revenues”. This can help them generate revenue for the people who invest in their community bonds, regardless of any subsidies or preferential pricing.
A focus on profitable projects and companies, regardless of political favour, can help you reduce the risks your portfolio may face while also achieving the social goals you desire.
Green investing isn’t without risk, but it could have benefits beyond just earning money. If you choose to use your portfolio as a tool to help pursue environmentally friendly goals, you must remember that you have double the due diligence to prepare for – you need to be sure that your investments are actually good for the environment and that they are also good for your wallet in the long run.