Green investing aims to support ethical, socially responsible and environmentally friendly business practices. The term “Green Investing” is often grouped together with SRI (socially responsible investing) and ESG (environment, social and governance).
SRI also known as a social investment is an investment in a business that is considered socially responsible. This does not have to be solely environmentally based and can include any socially conscious investing.
ESG are criteria that are used when investors with a socially responsible moral compass wish to assess the social responsibility of a potential investment. The environmental criteria assess a company’s environmental impact,
the social criteria assess a company’s relationships with its employees, customers, suppliers, and local communities and the governance criteria assess the company’s leadership, rights of shareholders, executives pay audits, and internal controls.
Together these criteria give investors tools to evaluate investment opportunities that look past traditional methods.
Green Investing is a category of SRI that focuses on companies and projects that are committed to the preservation of natural recourses, reduced pollution, and other environmentally-conscious practices.
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Socially Responsible investing SRI
SRI occurs when individuals, banks, superannuation, and other types of funds invest in companies that are socially responsible in their actions. However, SRI is hard to define as it is forever changing with the norms and values of society.
There are three main areas when we talk about how socially responsible a company or investment decision is, including, environmental, social, and corporate governance (ESG).
ESG is a term used a lot when socially conscious investors want to evaluate whether they invest in a company. Measuring these criteria and giving a score gives people the ability to factor social responsibility in their investment decisions. E stands for the environment and is where we analyze the environmental footprint of a company.
For example, initiatives in areas such as energy-saving and the reduction of pollution. S stands for social and is where we examine the working conditions of employees, clients, and suppliers.
The G stands for governance and is where we assess the structure of the company to see if it’s transparent and independent, how corporate officers are appointed and remunerated, and if there is respect for shareholders.
Green investment looks at the environmental side of ESG and is a large part of SRI. Green investments are made in companies that encourage, promote, or provide environmentally friendly products and practices. Anything to do with the natural environment or climate change comes under the “Green Investment” banner.
When we talk about “Green Investing” there is a term known as “shades of green” which demonstrates the spectrum of how green an investment opportunity is. Five main themes define what shade of green an investment opportunity may be.
These include ESG integration, Portfolio screening, Corporate advocacy, sustainability-themed and finally impact investing.
For example, you could invest in a fund that factors in the ESG criteria in their decision-making but doesn’t go much further than that. This would be considered light green as they are only doing the bare minimum when investing ethically.
If the fund you have invested started to exclude companies with low scores this would make the shade of green darker as they are “screening” the portfolio.
Exclusive portfolio screening and ESG integration are on the lower end of the spectrum because while these investment decisions are doing less harm, they are not going to result in social issues being solved.
Now imagine if the fund you have invested in owns 5% of XYZ and they, as a major shareholder, decide to attend a board meeting to convey that they would like XYZ to be more ethical in their business practices.
This is what corporate advocacy means as the fund is influencing corporate behavior through direct engagement. Within Ethical/Green finance we could consider this to be in the middle of the spectrum as now we are starting to see some changes being made to business practices. As we enter the “darker shades of green” we start to see inclusive portfolio screening.
This means that the fund you have invested in will start including companies in the portfolio with high ESG scores, rather than just leaving out the ones with low scores.
As we move into the darker shades of green ethical funds can be solely invested in companies that are sustainable regarding social issues like climate change, and moving one step further they can be invested in companies whose sole purpose is to solve issues that our world faces.
This is the “darkest shade” you can achieve on the spectrum and is known as impact investing.