I recently met with my financial advisor to discuss exactly where to invest the retirement accounts I would be rolling over.
I told him I was uncomfortable investing in big oil.
My poor advisor took a deep breath before breaking the bad news: if I wanted my retirement account to grow, I’d probably have to be a little flexible about that.
The truth of the matter is that the majority of our investment choices—at least when it comes to buying into mutual funds or retirement programs offering limited options—will probably conflict with some of our values.
Even though I personally try to shop green and otherwise use my money to support the environmental issues I care deeply about, I feel as though my hands are tied when it comes to growing my portfolio. People will always need energy, and big oil is already a known quantity in the market—which green energy is not.
However, the options available for environmentally- and socially-minded investors are both increasing and becoming more viable. If you want to be selective (and environmental) about where your investment dollars are going, here’s what you need to know:
Green Investing is Not Dead
Following the incredible popularity of Al Gore’s 2006 film and book An Inconvenient Truth, concern for the environment suddenly became mainstream. Not only did we start seeing many more green products (some of which were simply capitalizing on the popularity of the movement), but we also saw a big push for investments in alternative energy.
But the economic downturn of 2008 just as suddenly made green energy investments seem like a fad. Investors went from wanting their money to pave the way for improving energy technology to wanting to know that their money was safe. Why invest in something that might not pay returns—especially when the economy already seemed to be in a free fall?
You might assume that this would be the end of green investing altogether. However, as Thomas Kostigan of Market Watch observed,
“much of the initial investment that went into sustainable fuels, infrastructure, and technologies has laid the groundwork for long-term growth to emerge.”
Just as the popping of the Internet bubble in the 1990s did not spell the end of technology investing, the fall of green technology investments was part of the growth cycle.
While we are still not quite in the place where green investments can assure the same sorts of returns as more traditional investments, we are poised to see an incredible amount of growth in both the technology itself and the opportunities for investors to make money and feel good about it at the same time.
It’s also important to remember that some of the innovative new companies that will have a big impact on the environment were not specifically started as “green” companies. For instance, GreenBiz.com gives the example of Airbnb.com, the accommodation sharing site, as a new business that is reducing emissions, despite having no particular environmental goal as a part of its business plan. Companies like Airbnb.com are offering solutions to environmental problems as a happy side effect to their offered product—which means that it may be easier in the future to find more “green” companies, even if that is not their primary focus.
Green Investing on the Large Scale
Unfortunately, the majority of people like myself will likely never be in the position to directly invest in companies. My investments are made through mutual funds and through employer-sponsored retirement programs, meaning I don’t have the kind of choice over what companies to invest in that venture capitalists do.
But, two major pension funds have started using environment, social, and governance (ESG) criteria for choosing investment options—which likely means that more major pension funds, hedge funds, and endowments will follow.
According to Aaron Levitt of Investopedia, both the California Public Employees’ Retirement System (CalPERs) and the California State Teachers’ Retirement System (CalSTERs) have started to
“filter stock selection by only choosing firms that meet certain social or environmental standards. These ESG screens can include everything from resource management and pollution prevention to labor and human rights issues. The basic idea is to only engage in firms that have desirable social or ethical practices. By applying these screens to their research, the two pension plans hope to achieve added returns for their investors as well as change the world for the better.”
These two pension funds manage nearly $413 billion, which means that they can provide the gateway for other funds to provide social and environmental options for investment. And by using the portfolio investment strategy, these funds are protecting their investors from the historically disappointing returns of these sorts of investments—while giving the ESG companies an opportunity to grow and improve.
Aaron Levitt suggests in his article that even investors who are not part of CalPERs or CalSTERs can potentially take part in ESG investing by adding the Vanguard FTSE Social Index Investing mutual fund to their portfolio, or by following the iShares MSCI USA ESG Select Index, which tracks large- and mid-cap U.S. stocks for positive ESG characteristics.
Green Investing on the Micro Level
For those of us who do not yet have the opportunity to add green investments to our portfolio, it is always possible to invest environmentally on the personal scale—and still improve the bottom line.
- For instance, taking an afternoon with a caulk gun and weather stripping to plug up all the drafts in your home can save you up to 25% of your energy bills each year according to the Department of Energy.
- If you add in a programmable thermostat to your weatherizing plan, you can see even more savings without having to sacrifice any comfort in your home.
These sorts of personal energy investments can be enough to reduce your bills—freeing more money for traditional investing.
Even if you do not currently have the ability to put your investment dollars into green technology, making green (and frugal) choices on the personal level can ensure that you still feel like you’re doing your part for the environment and your wallet.
Do you consciously do any green investing? Do you think it’s a good idea? Where are you putting your investing dollars?