Ethical InvestmentGreen InvestmentInvestmentApril 19, 2022by NewCapitallink0An introduction to green investment funds

More people are adopting greener, more ethical lifestyles, which for many also entails putting their money into Green investment funds.

What exactly are green investment funds, we wonder? Where can I locate them? How do I pick one? And much more…

Green investment funds are what they sound like.

Green investment funds only invest in companies that they believe are environmentally responsible in some way.

This may imply excluding companies that cause environmental harm, such as those involved in fossil fuel extraction (negative screening). It may imply only investing in companies that promote environmental responsibility (positive screening), such as wind farms or solar panels.

Green funds are typically composed of multiple investments in a diverse range of companies across various industries, which helps to limit investor risk.

Some, on the other hand, concentrate solely on one sector, such as renewable energy assets or energy storage infrastructure. These more specialised funds are typically aimed at more experienced retail investors.

Green investment funds

What factors should I consider when selecting a green investment fund?

Here are some simple steps to assist you in selecting a fund.

  • Determine whether you want to fund a specific project (such as renewable energy) or if you want to invest more broadly.
  • You could also decide to put some money in a green investment fund while leaving some money alone.
  • If you already have investments, you should investigate their environmental credentials.
  • Determine your financial goals. You must determine whether there is a green fund (or funds) that matches them.
  • Do some research to determine which investments are truly green (by looking at companies, providers and the funds themselves). As a starting point, consult our guides to ethical funds and fossil-free funds.
  • After you’ve found funds that pique your interest, you should look into the best wrappers. Is it an ISA for stocks and shares, a pension, or a lifetime ISA?
  • It is usually worthwhile to consult with an independent financial advisor, depending on how much money you intend to invest.
  • They can provide you with a professional evaluation of the funds and assist you in making a decision on the wrapper.
  • Examine your investments. Monitor the performance of your investments on a quarterly basis, if possible. This will assist you in meeting your financial objectives.

Green investment funds

What factors should I consider when selecting a green investment fund?

When selecting a fund, there are a few things to keep in mind. This will assist you in ensuring that you are investing in what is important to you while avoiding greenwash.

  • Does the fund literature explain how environmental, social, and governance factors are considered and integrated into the investment process? It should explain the fund’s strategy, whether it is Impact, ESG, or SRI (more on this below). Are the requirements important? 
  • Do they conduct impact analyses on their holdings? Is the research and environmental data used to make investment decisions done in-house or outsourced? Generally, the former is preferable. You should also consider whether the criteria are broad or narrow. As a general rule, more specific is preferable. A smaller fund, for example, Castlefield B.E.S.T Sustainable Income Fund, has a named fund manager, Mark Elliot, and the fund factsheet includes a brief bio on his experience.
  • Are they open and honest? You should be able to see all of a fund’s holdings. This enables investors to scrutinise all investments and ensure they are as environmentally friendly as advertised.
  • Is the fund manager voting in favor of environmental policies at company AGMs? Some fund managers will have strict policies in place regarding how they interact with the companies in which they invest, and they will report on how they vote at AGMs (see our transparency rating for more on this). If they publish policies and reports on company engagement and voting on environmental policies, it demonstrates a commitment to change, and it is more likely that the funds they manage are not involved in greenwashing.
  • Are they a signatory to the UN’s Principles for Responsible Investment (PRI)? This demonstrates the public’s commitment to responsible investment.
  • Fund managers may be signatories to the UK Stewardship Code 2020 as well. This code establishes a standard for long-term investment.

Green investment funds

What are the various kinds of green investment funds?

Investments with a social or environmental impact, as well as those with a social or environmental impact, are

Impact, ESG and SRI investments

Impact investing, ESG (environment, social, and governance), and SRI (socially responsible investment) are all forms of ethical investing that may include green investment funds.

ESG investing screens potential investments using environmental, social, and governance (ESG) criteria. Traditional financial measures, which continue to be the primary motivator for such investments, are also considered by ESG funds in their investment approach, but some ESG funds may be labelled as green.

SRI establishes certain conditions for social responsibility using ESG considerations (among others) and then invests in businesses that meet those standards. As previously mentioned, this could include using positive or negative screening; some SRI funds will be environmentally focused and considered SRI funds.

Impact investments are aimed at assisting businesses that are doing good. They are intended to achieve specific objectives, which may include environmental objectives. Impact investments, on the other hand, tend to take a much longer term view of the investment rather than focusing on quick returns. Impact investments include some green investment funds.

There is some overlap between the three approaches, but in general, ESG investing is the most mainstream and impact investing is the most ethical.

However, it is important to evaluate the ethics of each company and fund.

Green investment funds

What is the distinction between an active (managed) fund and a passive fund?

What is the difference between an active and managed green fund?

A managed fund has a named fund manager who will regularly screen out companies that do not have strong green credentials and/or look for the best green investments.

A fund manager may evaluate a company based on a variety of general factors, such as transparency. Then, fund managers will consider specific green issues, such as their carbon footprint.

Some businesses will also be chosen because they are actively involved in providing green technology or services, such as the construction of wind turbines or solar panels.

 

What exactly is a passive fund?

You could put your money into a “passive” exchange-traded fund (ETF). An exchange-traded fund (ETF) is intended to replicate the performance of a stock market index.

According to The Times Money Mentor, “ETFs and tracker funds are less expensive than active funds because an investor isn’t paying for a fund manager’s stock-picking skills to buy and sell investments.”

A green ETF will typically exclude from an index any companies involved in certain activities, such as oil and coal extraction.

It may also shift the index’s focus to investing in companies that outperform on ESG metrics or have a low carbon footprint.

Green investment funds

Where can I locate green investment funds?

Green investments are now available from the majority of financial institutions. However, it is important to note that, as with other products, there is some greenwashing.

Green funds are frequently invested in industries that you might not expect. PensionBee’s green “fossil free pension fund,” for example, invests in companies that provide services to the oil and gas industry.

Some of the greenest funds are covered in our guides to ethical investment funds and to fossil-free funds.

 

Are green savings accounts a viable option?

If you don’t want to risk your money in a stock market investment fund, a green savings account could be a good alternative.

These are likely to have much lower interest rates (especially in the long run), but they provide a safe option.

Depending on the account you select, you can also be certain that your money will not be invested in any environmentally harmful projects.

 

Are green funds well-liked?

According to the Green Transition Scoreboard, a project run by Ethical Markets Media, $10.39 trillion has been invested in the green economy over the last ten years.

According to research firm Morningstar, funds that specifically invest according to ESG principles attracted $71.1 billion globally between April and June 2020, a 42 percent increase from 2018. This brings the total value of assets under management in environmental, social, and governance (ESG) funds to slightly more than $1 trillion.

In 2020, ESG funds accounted for nearly a third of all European fund sales.

Green investment funds

Do green investment funds outperform?

Green funds have outperformed in recent years. According to Morningstar, sustainable funds outperformed traditional funds in 2019.

Investopedia reports:

“66% finished in the top half of their categories, with 35% finishing in the top quartile.” Only 14 percent of sustainable funds’ returns were in the bottom quartile.”

According to HSBC Research, climate stocks outperformed global equities by 7.6 percent in the three months following 10 December 2019 (the date of the first recorded COVID-19 case in China), while high ESG-rated stocks outperformed others by 3.7 percent.

According to a Harvard study, companies with high ratings on the most important sustainability issues to their industries outperform companies with low ratings on these issues.

Green investment funds

Green funds with the best returns

According to This Is Money, some of the top performing green funds right now are:

  • Impax Environmental Markets Environmental
  • Menhaden Environmental 
  • Renewables Infrastructure Group Renewable Energy Infrastructure 
  • Jupiter Green Environmental 
  • Bluefield Solar Income Fund Renewable Energy Infrastructure

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