What is green investing?
From recycling and power generation to organic food and sustainable fishing, the world is going green. Almost everyone, from climate scientists to businesses to consumers to politicians, has an interest in reducing the burden humans place on the environment.. Investors looking for ways to go a little greener with their portfolios may be surprised by the wide range of products available.
Important points
- Green investing seeks investment opportunities that also benefit the natural environment.
- One of the main destinations for green funds is renewable energy technologies such as wind, solar, and hydropower.
- Green transportation is also an emerging technology, reducing fossil fuel consumption through electric vehicles.
- Pollution control, waste reduction, and sustainable agriculture are alternatives to environmental protection.
- Water is also a dwindling resource, and many mutual funds focus solely on water infrastructure.
Understanding green investing
Green investments are companies or funds that look for ways to reduce harmful pollutants or use resources more sustainably. This could come in the form of alternative technologies such as solar and wind power, or research into how to use resources more efficiently.
Green investments bring not only profits but also environmental benefits. Older technologies, such as fossil fuels and polluting industries, are likely to face higher costs and regulatory barriers as the world adapts to climate change, creating market opportunities for alternative technologies. Many mutual funds and index funds seek out these alternative investments in hopes of higher returns in the future.
Renewable energy
In a world concerned about climate change, green energy has become a hot topic. Electricity generation that does not rely on burning fossil fuels to generate electricity for homes and industry is creating a growing number of investment opportunities. Water, wind and solar power are among the main sources of renewable energy. There are several alternative energy ETFs and mutual funds available to investors.
It is clear that global warming is caused by human influence. According to a report by the United Nations Intergovernmental Panel on Climate Change, some forms of climate change have been locked up for centuries. “This report must sound the death knell for coal and fossil fuels before they destroy our planet,” UN Secretary-General António Guterres said in 2021.
hydroelectric power
Water has also been the go-to resource for renewable energy for centuries. The ancient Greeks ran flour mills using water power. Projects like China's giant Three Gorges Dam can power 70 million to 80 million homes. According to the International Renewable Energy Agency (IRENA), hydropower is the most cost-effective means of generating electricity.
While there are few pure hydro stocks, there are three energy producers with significant amounts of hydropower in their portfolios. PG&E (PCG) is one of the largest investor-owned hydro utilities. IdaCorp (IDA) has 17 hydropower projects. Brookfield Renewable Partners (BEP) operates more than 8,000 power generation facilities.
wind power
Wind power is one of the fastest growing renewable energy sources, increasing 75 times from 1997 to 2018. In 2020, China led the world in new wind power generation installation rate at 55.91%, followed by the United States at 18.19%.
If you are interested in this renewable energy, look for wind farms that sell wind-generated energy or consider companies that manufacture wind turbines. While there are few pure investment stocks, some interesting wind energy stocks include:
- General Electric (GE)
- NextEra Energy Partners (NEP)
- Siemens Gamesa Renewable Energy (GCTAY)
- Vestas Wind System (VWDRY)
First Trust Global Wind Energy ETF (FAN) Provides a passive way to invest in wind energy.
solar energy
Energy from the sun powers homes, buildings, and a variety of items from lights to radios. Look to companies that make solar panels to benefit as more homeowners and businesses adopt solar power.
First Solar (FSLR) is a leading manufacturer of solar modules and systems. JinkoSolar Holding (JKS) also manufactures solar modules and claims to have provided 190 gigawatts of production capacity. SunPower (SPWR) makes solar modules and energy storage solutions for homes and businesses.
Of course, there's more to solar power than just panels. From components to installation, a variety of companies offer investment opportunities, including:
- Enphase Energy (ENPH)
- Sunrun (RUN)
- Invesco Solar ETF (TAN)
geothermal energy
Geothermal energy uses the earth's heat to produce clean energy. Ormat Technologies (ORA) builds, owns, and operates geothermal power plants with operations in the United States, Guatemala, Guadeloupe, Honduras, Indonesia, and Kenya.
pollution prevention
The key word here is reduction. From reducing greenhouse gas emissions in industrial power plants to minimizing emissions coming out of car tailpipes, the pollution prevention industry continues to grow. This is an industry that responds every time it is required by law to improve the amount of harmful chemicals that can be released into the environment. Companies and ETFs focused on pollution prevention technology include:
- Fuel Tech (FTEK)
- VanEck Vectors Environmental Services ETF (EVX)
- Invesco MSCI Sustainable Future ETF (ERTH)
green transportation
When it comes to transportation, Tesla (TSLA) is the first name that comes to mind for many people. With its high-profile leadership and exciting technology, this company is always in the news, but it's not the only game it has.
Researchers are working to develop alternative ways to power cars using fuel cell technology. If this technology works, there will be millions of cars and millions of consumers waiting for it.
Companies operating in this space include Ballard Power Systems (BLDP), which manufactures cells for use in vehicles and backup power systems. FuelCell Energy (FCEL) is focused on providing power options for commercial and industrial facilities.
waste reduction
Recycling has become standard practice. Most people know that paper, metal and glass can be reprocessed and reused, but the number of things that can be recycled continues to grow. Waste oil, vegetable oil, batteries, mobile phones, computers, and even some car parts can be given a second life. There is business activity going on in the background to recycle these items.
Waste management companies with large recycling facilities, such as Republic Services (RSG) and Waste Management (WM), could be interesting from a portfolio perspective.
alternative agriculture
Agriculture and livestock are major contributors to carbon emissions, not to mention the ecological impact of agricultural fertilizers and pesticides. There are several ways to reduce the ecological footprint of agriculture.
organic farming
Organic farms avoid the use of pesticides. They are committed to sustainable farming practices, sell products that are healthier to eat than something made up of unpronounceable three-syllable words, and have a shelf life measured in decades.
We also practice animal management that avoids the use of hormones and antibiotics. This prevents these chemicals from entering the food chain and the ground and water around the farm. One of the largest organic food companies is United Natural Foods (UNFI), a health food wholesaler.
aquaculture
Sustainable fishing is another food-related investment opportunity that is gaining traction as the plight of global ocean overfishing impacts the human food chain. Mowi ASA (MNHVF), a Norwegian company with global operations, is an interesting player in this space.
investing in water
Water is one of the most important natural resources we have. There is great concern that climate change will cause the world to run out of fresh water. Cape Town, South Africa, was months away from being depleted in 2018 before prompt conservation measures restocked supplies.
The European Environment Agency points out the following: Twenty European countries depend on other countries for more than 10% of their water resources. Five countries (Netherlands, Hungary, Moldova, Romania and Luxembourg) rely on rivers coming from other countries for more than 75% of their water. Cities from Los Angeles to Miami are worried about running out of water as climate change takes a toll on America's water resources.
A portfolio of water investments may include companies that collect, purify, and distribute water. The largest water utility company in the United States is American Water (AWK), which provides drinking water to 14 million people. Essential Utilities (WTRG) provides water to approximately 5 million people. Sticking to our water theme, these utilities are just the tip of the proverbial iceberg.
If you don't want to pick individual stocks, mutual funds offer an additional way to invest. Calvert Global Water Fund and Virtus AllianzGI Water Fund leverage water-based opportunities around the world.
Exchange traded fund products include:
- Invesco Water Resources Portfolio ETF (PHO)
- Invesco Global Water Portfolio ETF (PIO)
- First Trust Water ETF (FIW)
- iShares U.S. Utilities Index ETF (IDU)
- Zacks Global Water Index
- Invesco S&P Global Water Index ETF (CGW)
Main environmental policy
The urge to go green is a growing phenomenon for many companies. Some companies adapt, others don't. Green space investment managers are beginning to categorize companies based on their position along the green spectrum.
Let's take an oil company as an example. You might not think that these companies are environmentally friendly, but most of the time they aren't. But if you take a closer look at their business models, it's easy to see that some companies are more environmentally friendly than others. Several major oil companies are leading the way globally in pushing for taxes on greenhouse gases and investing in energy sources that will help shift the world away from oil.
Choosing companies with the best environmental records and practices is another way to consider green investing.
Which developing countries are investing in green energy?
China is by far the largest contributor to green energy, both in terms of installed capacity and production. China will have installed 365 GW of wind turbines and 392 GW of solar panels by the end of 2022. It has also established itself as a leading manufacturer of renewable energy equipment and electric vehicles.
Brazil, Germany and the United States also had significant renewable energy generation capacity at the end of 2021, according to the International Renewable Energy Agency.
Which oil companies are investing in green energy?
Several major oil companies are investing in renewable energy and low-carbon technologies, including BP, ExxonMobil, Chevron, and Shell. However, as of 2020, these investments still account for less than 1% of the overall budget. There is little evidence that these companies are transitioning away from fossil fuels.
How do you identify green investments?
Some green funds target a basket of companies with strong ESG or sustainability credentials. Some companies focus on specific areas of the green economy, such as renewable energy. Any of these funds can be a good starting point for identifying green investments. When researching green funds, be sure to read the prospectus and the fund's criteria to ensure the fund's values align with yours.
conclusion
If green investing catches your eye, there are many ways to incorporate it into your portfolio. There is no need to choose individual companies to enter this field. Mutual funds, exchange-traded funds, stocks, bonds, and even environmentally focused money market funds are available.
