Eco-investing, often also referred to as green investing, is the investing in projects or businesses that are committed to discovering and producing alternative energy sources, conserving the world’s natural resources, or implementing clean water and air projects. Eco-investing falls under the umbrella of SRI or Socially Responsible Investing.
A 100% eco-friendly investment is one that derives most or all of its profits and income from green activities. Eco-friendly investments also include investments in firms that are involved in other areas of business but also concentrate on eco-based product lines or initiatives. This article will review a number of eco-investing sectors as well as relevant publicly traded companies and ETFs.
- How did eco-investing start?
- Why is eco-investing growing so rapidly?
- What are the consequences of this growth in demand?
- Top eco-investing opportunities
- Leading environmental policies
- Other options for green-cautious investors
How did eco-investing start?
Some academics hold the view that eco-investing had its modern origins in all earnest about 30 years ago, during the 1990s – at a time when investors started to become really concerned about the damage the business world was doing to the environment and the pressure whole industries were placing on it.
In the aftermath of events such as the Exxon Valdez oil spill and seemingly never-ending conflicts over logging rights in the American Northwest, a group of investors started to regard firms that were better equipped to manage the environmental impact of their activities as superior long-term investments than the rest. According to this group of investors, these businesses were not only functioning more ethically, but they also had a long-term competitive advantage over firms that were ill-prepared to limit their impact on the environment.
Another group of investors held the view that the investment community had an ethical obligation to invest in firms and technologies that were aiming to help build a more sustainable society via alternative energy sources.
Why is eco-investing growing so rapidly?
If a few decades ago eco-investing was a conscience-soothing activity, it has now without any doubt evolved into a mainstream business opportunity. In the years to come its importance will in all likelihood only increase further.
Many speculate the demand has been driven by the EU 2050 net-zero target as well as various regulations, institutions, and also society as a whole. The changeover to a low-carbon economy is a reality and that’s what is behind the surge in eco-investing. In decades prior, eco investments were previously regarded as too expensive and investors believed there was insufficient proof that they could outperform other types of investments. This perspective has changed drastically.
Not only is pressure from both government and other quarters pushing up demand, but the performance of eco-related funds currently compares extremely well with other types of investments. While regulatory pressure from the EU continued to play a role, that was not the only driving force. Pension fund trustees are nowadays also taking eco-investing issues much more seriously, if for no other reason than the increasing support for this type of investment from ordinary pension fund members. Millennials as a group are particularly serious about their investments having a low carbon footprint.
Around a trillion Euro will be moved into green portfolios if the European Green Deal comes to fruition. This is happening faster than most people expected. Natural disasters such as floods in the UK and fires in Australia and California have made it very clear to investors that climate change is a reality. Investors are increasingly questioning investment funds that are, for example, invested heavily in oil company stocks. They are adamant that they rather want to invest in renewable energy than in fossil fuels.
What are the consequences of this growth in demand?
This tremendous growth in demand for eco-friendly investments of course has certain consequences. To start with, investment managers are increasingly under pressure to make sure they can offer their clients investment products with a green footprint.
As far as the regulatory environment is concerned, the European Commission has an action plan for sustainable finance that is already busy shifting the playing field even more in favour of eco-friendly investments.
Top eco-investing opportunities
People who are searching for ways to invest in green investment opportunities might be quite surprised to find out exactly how many of them there already are. Let us take a closer look at some of the top eco-investing areas. Note that these are only examples and not investment advice.
Solar energy nowadays powers not only residential properties, but also things such as radios, lights, electronic equipment, and much more. If you are one of those investors who understand that the growth potential for solar power remains huge, you should concentrate on firms that manufacture solar panels. These will benefit from businesses and homeowners increasingly switching to solar power.
Sunpower, for example, manufactures solar modules as well as storage solutions for businesses and homes. JinkoSolar Holdings also manufactures solar modules and claims that until now it has delivered production capacity of no less than 52 gigawatts. First Solar is another leading manufacturer of solar systems and modules.
There are, of course, more solar investment opportunities than just solar panels. There are a wide variety of firms that offer investment opportunities in this field. These include makers of components to companies that install solar systems. Here are a few Exchange Traded Funded (ETFs) that give investors exposure to the solar energy sector:
Water is undoubtedly one of our most precious natural resources. There is a growing fear that climate change will cause the planet to eventually run out of water. According to the European Environment Agency, about 20 European nations have to rely on other countries for over 10% of their water needs. Five of them (Romania, Moldova, Luxembourg, Hungary, and the Netherlands) rely on rivers that have their origins in other countries to provide in excess of 75% of their water needs. In the US, cities such as Miami and Los Angeles are increasingly worried about climate change leading to water scarcity.
A balanced portfolio of water-related eco-investments could, for example, include firms that distribute, purify, and collect water. The biggest water utility business in the United States, American Water, supplies drinking water to around 14 million individuals.
Investors who feel that risking their money on individual water-related stocks is too dangerous might choose to invest in mutual funds. The Allianz Water Fund and the Calvert Global Water Fund are involved in water-related activities across the world.
Exchange-Traded Funds that are involved in this field include:
- First Trust Water (ETF)
- Invesco Water Resources (ETF)
- Zacks Global Water Index (ETF)
- iShares U.S. Utilities Index (ETF)
- Invesco Global Water Portfolio (ETF)
- Invesco S&P Global Water Index (ETF)
Wind power is one of the world’s fastest-growing renewable energy sources. The industry has experienced a growth rate of 75% over the last 20 years. China is the world leader in this field with an installed capacity of 217 gigawatts (2017). In second place (but far behind) is the United States with a capacity of 96 gigawatts. In the third position is Germany with a capacity of 59 gigawatts.
Investors who are interested in this type of renewable energy should focus on wind farms or businesses that make turbines. Here are a couple of the more appealing wind power stocks:
Apart from these individual stocks, the First Trust Global Wind Energy ETF offers a passive way to expose your portfolio to wind energy stocks.
As far as transportation is concerned, Tesla (TSLA) is probably the first name on most people’s list. Although the company regularly makes news headlines, it’s by far not the only kid on the block.
Fuel-cell technology firms are working with researchers to create an alternative way to power motor vehicles. If this becomes a reality, it will undoubtedly be welcomed by billions of consumers.
Businesses that are active in this field include FuelCell Energy. FuelCell Energy concentrates on delivering power options to industrial and commercial facilities. Another company, Ballard Power Systems, is involved in the production of cells that can be utilized in backup power systems as well as in vehicles.
Recycling has become the norm rather than the exception in the 21st century. The majority of people reading this will know that glass, metal, and paper can be recycled and reused. That list is, however, rapidly getting longer. Products that are being recycled include vegetable oil, waste oil, smartphones, batteries, car parts, and computers. All of these are creating many new business opportunities and there are still huge opportunities for growth.
Waste management firms with an extensive base of recycling plants are particularly interesting. The list here includes businesses such as Waste Management, Republic Services, and Covanta. The latter follows a different route by generating electricity from waste incineration.
Organic farms not only avoid using pesticides, but they also follow sustainable farming principles. Organic farms sell products that in some research has shown a higher nutrition content versus non-organic. Thus, they can potentially be seen as slightly healthier to eat than non-organic.
Organic firms also follow sound animal management practices and refrain from using antibiotics and hormones. In the process keeping potentially harmful chemicals out of the ground. As a result, they never enter the food chain, and remain out of our water supplies. An example of a large publicly traded organic food firm in the U.S. is United Natural Foods.
The name of the game here is reduction. The pollution control industry is showing strong growth; from reducing the carbon emissions of the average family car to cutting back industrial power plants’ greenhouse gas emissions.
A few examples of ETFs and firms that are involved in this industry include:
Another food-related industry that is creating investment opportunities is fishing. At a time when overfishing of our oceans is starting to negatively affect our food supplies, investors are open to change. A notable player in this game is the Norwegian firm Mowi, which is already operating internationally.
Geothermal energy refers to the process of using the earth’s heat to produce eco-friendly energy. A major player here is Ormat Technologies, which owns, builds, and runs geothermal plants in the United States, Guadeloupe, Guatemala, Indonesia, Honduras, and Kenya.
Leading environmental policies
For many businesses, the desire to become more eco-friendly is a fairly recent phenomenon. As with most other instances of change, some of them will fare better than others in this. That is why investment managers of funds that are active in the eco-friendly industry have started to grade firms according to the place they occupy on the green spectrum.
Oil companies are a good example. When asked to think of an eco-friendly industry, the oil industry is probably not the one that most people would think of first. If we take a look at these business models, you will realize some of them are more eco-friendly than others. As a matter of fact, quite a few major oil companies find themselves on the list of international leaders when it comes to investing in alternative energy sources and supporting a tax on greenhouse gasses.
Other options for green-cautious investors
There are several options for investors who want to invest eco-friendly but who are cautious about investing in individual “green” stocks. Options for investments includes ETFs, mutual funds, bonds, as well as money market funds. Firms such as earthfolio.net and svx.ca (not 100% live yet) aim to offer full wealth management services with a strong focus on eco-friendly investments.
Eco-investing is a burgeoning area where investors can put their money behind causes they feel will benefit the planet and their portfolios. There are several industries, such as solar, wind and even oil, where innovative companies are going green and developing more efficient technologies that also are more eco-friendly. Investors should be careful when considering investing in any new technologies or companies that show great promise, yet no real great profit or revenue.