What is a Green Investment?

Green investment is becoming an increasingly popular term to describe a specific type of investment, but there is currently no agreed definition of a green investment. Some companies have come up with their own definition; however, these are not considered to be industry-wide and the following terms are frequently used to describe similar investment products:

• Green
• Environmental
• Sustainable
• Eco/Ecological
• Ethical
• Clean Energy/Tech
• New Energy
• Renewable
• Energy Efficiency
• Smart Energy
• Leadership
• Socially Responsible Investing (SRI)
• Environmental, Social, Corporate Government (ESG)
• Impact investing

Some of the above terms are more defined than others, but they are used quite liberally throughout the industry, and your personal definition may not match that of the investment industry/company. Our aim at the Green Finance Guide is to provide more clarity around what makes these investments green, but it’s also important to understand the language that others use to describe these investments – below you will find a quick introduction to how some companies choose to define ‘green’ investment.

SRI and ESG

Many investments fall under the wide category of socially responsible investing (SRI) or environmental, social, and corporate governance (ESG) investing. These terms broadly cover the same thing, that is, investments made in:

• Environmental products – e.g. renewable energy producers
• Social products – e.g. health services
• Companies with good corporate governance – e.g. companies which offer good benefits

These terms also generally preclude investment in firms that go against the following principles:

• Polluting or fossil fuel industries
• Companies doing social harm – e.g. cigarette manufacturers, gambling industry, defence companies
• Companies with poor human rights – e.g. exploitation of cheap or child labour

The issue with the SRI or ESG labels is that in many cases they may preclude negative investments, but they don’t incentivise investments in companies actively doing good. Some argue that this means many SRI or ESG investments will actually have a neutral effect on the world – neither doing good or bad.

Impact Investing

Impact investing is regarded as a subset of SRI or ESG, whereby the investments are actively doing good in the world; ideally in a measurable way. These investments are made intentionally in projects with positive environmental or societal aims. There are not any strict definitions of ‘impact investments’ but many align themselves with the UN’s Sustainable Development Goals or the Paris Agreement on Climate Change.

It is important to point out, however, that many investment funds don’t advertise themselves as being impact investors, preferring the ambiguity of other terms to allow them the freedom to invest in a wider range of financial products.

Greenwashing

Environmental awareness has been a tool of marketing campaigns and PR agencies for a long time. These campaigns have the ability to soften a hard corporate image with green motifs and mottos, whilst trying to persuade the consumer that a company’s ethos is aligned with environmental and social responsibility.

Investments can also be greenwashed to make them seem more environmentally friendly than they are, with the aim to capitalise on the demand for environmentally sustainable products. However, due to the complex nature of investment funds and the fluid definition of ‘green’, non-green investments can be hidden amoungst a sea of more environmentally investments. Some funds may consider natural gas investments to be clean – since less carbon dioxide is emitted than coal for the same amount of energy. But natual gas is still a fossil fuel and therefore some investors may not consider it to be green.

Some organisations now provide methods of green certification for certain investments and there is increasing government action on this issue [1]. However, detailed and transparent investment information coupled with investor vigilance and knowledge is currently the best method of combating greenwashing.

Summary

There are many different terms used when referring to green investments and no agreed definition across the industry, which means consumers need to be cautious when trying to identify investments which align with their own values. Furthermore, investors should be aware that some companies may take advantage of the goodwill shown towards environmental causes to greenwash their own financial products. Therefore, the clearer the information available to investors the more more targeted their green investments can be.

References

1. Reuters, 2019, EU agrees on new rules to counter investment ‘greenwashing’ [accessed 4/4/19]