Green Investing

Learn more about the green investment trend -- investing in companies and projects that help the environment.

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Eco-minded people are putting their money where their conscience is -- into "green" investments that support the environment. This can include efforts to reverse global warming, clean the earth's oceans, develop alternative energy, and generally speed our progress toward sustainability. As a result, there are now hundreds of public companies that tout their greenness, dozens of green mutual funds, and even a handful of green stock market indexes.

Of course, being "green" doesn't turn an investment a financial winner. The start-up companies, in particular, are inherently risky endeavors. But if you like the idea of using your money to protect the environment and encourage earth-friendly innovation, then green investing might be for you.

What Is Green Investing?

Green investing is a philosophy that promotes steering investment dollars toward environmentally conscious or friendly companies and projects. The definition of a green company varies among investors. For some, it means the company is actually engaged in solving environmental problems -- developing alternative energy sources or producing organics, for example. For others, a company qualifies as green if it recycles, conserves natural resources, and generally conducts business in an environmentally conscious way, with less regard of what the underlying business is.

"Green investing" is often used interchangeably with "socially responsible investing" (SRI), but SRI has a broader focus in that it embraces companies that have a positive impact on society, not just the environment. For example, a company that treats its workers particularly well or donates a significant amount to charity might be considered socially responsible. So, while all green investments are socially responsible, not all socially responsible investments are green.

Green Investment Options

Here are some of the options for building a green portfolio:

Securities. Individual stocks enable investors to funnel their investment dollars to, perhaps, a handful of companies that meet their environmental and performance criteria.

Mutual funds and exchange-traded funds (ETFs). Investing in a pool of securities gives average investors an affordable way to diversify across multiple sectors or industries.

Some green mutual funds are Portfolio 21 (PORTX), Green Century balanced (GCBLX) and equity (GCEQX) funds, and the Winslow Green Growth Fund (WGGFX), though there are many others. See Nolo's article Consult a Professional or Green Investment Website below for more information.

Bonds. Fairly new on the scene of green investing, green bonds generate funds for eco-friendly business ventures. When offered by governments to fund green projects, this fixed-income vehicle may provide tax-exempt income.

To find specific investments that fit your criteria for greenness, you can do an Internet search using keywords like "green stocks," "green mutual funds," "green bonds," "green investing," and similar terms.

Selecting Green Investments

Nowadays, there are numerous green investments to choose from. When building your portfolio, find investments that match your environmental criteria, avoid companies that overstate their greenness, and evaluate the fund's financial performance.

Match Investments to Your Green Criteria

Identify the desired criteria for your portfolio by answering questions like these:

  • Are you interested only in companies that are focused on developing solutions (alternative energy and waste reduction, for example), or is it enough for a company to have a strong energy conservation and recycling program, or to financially support environmental causes?
  • Are certain industries or projects strictly off limits? For example, would you be willing to invest in the timber industry if the company whose stock you purchase follows sustainable logging practices and spends money on preservation and reforestation?
  • Do you have the risk tolerance to invest in "pure play" green investments -- those that derive all or most of their profits from green products, activities and innovation, and, consequently, have the potential to be more volatile? Or would you prefer the greater stability you might get from companies that engage in other business areas as well?

When purchasing individual stocks or bonds, analyze each one to determine its appropriateness for your portfolio. For mutual funds, read the prospectus to learn how the fund selects its holdings and to confirm that your philosophies match those of the fund manager.

Avoid "Greenwashing"

Beware of companies that use environmentalism as a marketing strategy. Dubbed "greenwashing," overstating a company or fund's greenness is a way for some businesses to make themselves more attractive to certain investors.

Evaluate the Investment's Performance

While you're determining whether an investment fits your criteria for being green, also learn about its past financial performance. You want your choices to reflect your values, but you also need your money to grow.

One way to evaluate an investment is to compare it to a benchmark. Common benchmarks include the Dow Jones Industrial Average (DJIA) and the S&P 500, though there are many others.

In 1990, a new index, the Domini 400 Social Index (SD400), was introduced. The index includes 400 companies that meet certain standards for social and environmental responsibility. This index is often used to benchmark, or compare, a green mutual fund's performance. Though the Domini 400 was the first social index, it is no longer the only one.

Consult a Professional or Green Investment Website

For help choosing green investments, you can ask a financial adviser. You can also learn more by visiting green investment sites such as Green Chip Stocks, at www.greenchipstocks.com, GreenMoney Journal, at www.greenmoneyjournal.com, SocialFunds.com, at www.socialfunds.com, and Renewable Wealth, at http://renewablewealth.com.

To learn more about investing and financial planning for your family, get The Busy Family's Guide to Money, by Sandra Block, Kathy Chu, and John Waggoner (USA Today/Nolo).

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