Investing in Our Planet

Earth Day in 2023 will be celebrated on Saturday, April 22. This year’s theme is “Invest in our Planet.” ESG and green investing are two investing approaches that not only help promote a sustainable environment, but they can also prove profitable for investors.

ESG Investing

ESG stands for environmental, social and governance. These ESG screens are used by many socially conscious investors to screen companies to determine if they fit their standards for investing.

Environmental considerations can include a company’s policies on climate issues. These issues include the conservation of natural resources, their energy usage policies, their efforts to avoid polluting the environment and a host of other related issues.

Environmental issues are important from the standpoint of saving the planet, but also have practical business implications for an investor looking at a company’s stocks. If a company is in violation of environmental rules and pollutes the environment, this can result in fines and other monetary penalties that detract from the bottom line.

Social considerations include aspects of how the company does business both internally with their own employees and externally with suppliers and customers. Does the company offer safe working conditions that promote their employees’ health and safety? Do they have proactive diversity and nondiscrimination in their hiring practices? Is the company supportive of the LBGTQ community as part of its diversity efforts?

Not only does a more diverse workforce focus on having the best people in place at the company, it reduces the likelihood that the company will find itself being sued for discrimination. Focusing on employee safety also helps companies avoid litigation if one or more employees become sick or injured due to unsafe working conditions.

Governance looks at whether or not the company uses clear and accurate internal and external accounting methods. Governance is also about whether or not a company exhibits integrity in selecting its board members, and, further, their efforts to avoid conflicts of interest there as well.

A characteristic of a company that is well governed is one where the chairman of the board is someone other than the CEO.

Overall companies that do well on all three aspects of ESG often tend to be better managed, have a more diverse and engaged workforce and tend to be more focused on their businesses impact on the environment.

They also may tend to be more profitable than firms that do not score well on the ESG scale since they are likely to avoid fines or other negative monetary implications from violations relating to the environment, their treatment of employees or ethical violations.

ESG investing can be done by selecting individual stock and bond holdings after screening the underlying company for their adherence to various ESG criteria. Alternatively, ESG conscious investors can invest through a mutual fund or ETF that focuses on holdings that meet specific ESG metrics.

Green Investing

Green investing is about investing in companies that do business in a method that is consistently environmentally friendly and strive to conserve natural resources.

Green investors focus on investing in businesses or funds that seek ways to reduce harmful pollutants or use resources more sustainably. This may arise from a focus on alternative technologies such as solar or wind power or via researching ways to use resources more efficiently.

Green companies may have areas of focus such as renewable energy, hydroelectricity, wind power, solar energy, geothermal energy and green transportation.

Green investors may invest in:

  • Green stocks, which are stocks in companies whose business is run with a strong green commitment. These companies can range from start-ups to established companies transitioning to doing business with a low carbon footprint. Tesla is an example of a company that has achieved great success by targeting environmentally conscious consumers and investors.
  • Green bonds are fixed income securities that represent loans to help banks, governmental entities and companies finance projects with a positive environmental impact. The so-called climate bonds may have tax incentives or investors in some cases.
  • Green funds are mutual funds or ETFs that focus their holdings on green companies. These funds are professionally managed and allow investors to invest in a diversified portfolio of green companies.

Green investing not only demonstrates an investor’s commitment to supporting companies with a commitment to the environment, it is also a legitimate way to focus on companies that can be solid investments.

While there is risk when investing in green companies, studies by experts including Morningstar have shown that green investing can be profitable while promoting environmental sustainability.

If you’d like to learn more about ESG focused investing and green investing, contact your Wedbush financial advisor to see how these approaches can fit into your investing strategy.



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