Green Funds: Saving For A Greener Future…Literally!
Despite times being a little tough and with my outgoings still at the highest they have ever been, I really want to put some more money aside this year in a savings account. But I thought, rather than using a traditional savings product from a bank, why not take a look and see what my options are if I want to put my money into a green investment fund.
The idea came to me when I was thinking about how businesses raise money to change their practices or processes and become greener (you’ll find that most big companies now produce a Corporate Responsibility report on a yearly basis – see my post on supermarket sustainability for reports from Tesco, Asda, Sainsbury’s, Morrison’s and Waitrose). It must take a fair bit of money to change the way a business operates and for small businesses this can be particularly prohibitive what with cash flows to keep healthy.
And then there is green energy production itself; how do companies raise money to develop green technologies for energy production? Who pays for the equipment and maintenance? I know that funding is sometimes obtained through government grants but it also comes from private investors and I want to put some of my savings into such projects.
Let’s face it, helping businesses lessen their impact on the environment and enabling new renewable energy sources to be constructed to reduce the UK’s reliance on fossil fuels, whilst also getting a return on my investment is definitely a win-win situation!
Savvy Investor or Novice?
Ha! Well, I must confess to being a bit of a novice. I haven’t really dabbled with stocks before so the learning curve might be pretty steep. However, what I do know is that there are a number of ways I could invest in green energy and energy efficiency projects:
- I could buy shares in individual companies
- I could choose to look at investing in stock indexes, for example the Ardour Global Index which is made up of green companies through exchange-traded funds (or ETFs for short).
- Or there are managed funds, which would involve me giving my cash to a fund manager who would then allocate my money based on a green prospectus.
There are two kinds of funds concerned with green or ethical investment. The first are so-called ‘ethical funds’, which aim to invest in companies that are already behaving in an ethical manner, and the second are energy funds which look to aid the development of alternative energy sources and other sustainability projects.
An example of the former is the Kames Ethical Equity Fund. The fund makes sure that any potential companies they may want to invest in do not engage in any unethical activity such as harming animals, engaging in weapons manufacture or, in the case of those in the energy industry, are taking steps to tackle climate change.
Examples of the latter include the BlackRock New Energy Investment Trust, the Jupiter Green Investment Trust or the Craton Capital Renewable, Alternative and Sustainable Resources Fund.
A whole lot of choice…
It seems like there is a lot of choice out there but a question that does spring to mind is what actually makes a ‘green investment’ green? The answer to this seems to lie with the individual and their own interpretation.
According to thisismoney.co.uk, BP stock features in “ten so-called ‘ethical’ funds, even though the oil producer has had the worst oil spillage in history”. This is pretty shocking and I certainly would not be happy to invest in an oil company altogether given the direct detrimental effect they have on the environment.
However, oil demand is high so perhaps it would be better the try and help an oil company find greener ways to extract the oil required or improve their disaster rate? Not sure about this but with the amount of money they make, it could be that oil companies are best placed to fund the R&D required to come up with commercially viable clean energy solutions.
Or should I look to alternative energy forms such as solar and wind? Funds which focus solely on renewables and who have tougher selection criteria are commonly referred to as ‘dark green’ and this is what I would look for if I were to invest. Other funds might be considered ‘light green’ which could allow investment in oil companies for example as their inclusion criteria are far more flexible.
Popularity and Performance
From my research, it seems that the number of green investment opportunities over the last 10 years has grown significantly and according to a research firm called Experts in Responsible Investment Solutions, returns are now starting to outperform ‘unethical’ funds.
In the past, ‘green’ funds have perhaps underperformed because the companies in question chose to put their morals above profits. But with consumer spending being driven more and more by social responsibility and a genuine push by governments to tackle climate change, this may no longer be the case as green ideals do not necessarily prevent healthy profits from being made.
The positives of green investment
The overall concept of improving the green credentials of business and investing in greener energy production seems to be a good thing in my opinion. Below are a few advantages that solidify this and explain why I am seriously considering investing my savings in a green fund:
- By investing in green energy, I would be helping to develop new sources of green energy and also improve the efficiency of existing renewable energy sources.
- By investing my money in green funds, I could be helping companies to look at and hopefully adopt energy sources that emit less or no carbon thus slowing global warming.
- Growing investment levels in greener energy production helps to showcase public support. Increased popularity can highlight to politicians that we, as a society, are concerned about our environment and how businesses operate within it. With mounting support, this could help steer politicians into faster adoption of green legislation for industry and business in general.
- There are links between the increased concentration of harmful chemicals in the atmosphere and ground (caused by burning fossil fuels) and increased rates of cancer. I would jump at the chance to lessen the proliferation of these chemicals so that future generations do not suffer from their harmful effects.
- Investment in green utilities means a greater chance of long term price stability for the consumer. Sunshine, wind and other renewable energy sources are free at the point of generation, so it’s only really the maintenance and initial investment in equipment that are associated costs. This is an attractive feature for companies as it allows them to better plan for energy costs in future cash flow projections. I also find stable energy prices appealing as I have just about had enough of crazy price hikes followed by much smaller cuts as the price of oil and gas fluctuates – I do need to do a bit more research on this in a future post.
- With dwindling supplies of fossil fuels, green energy will have to be able to provide the energy shortfall in the future.
And the downsides
- Some funds call themselves ‘green’ or ‘ethical’ but how reflective of the truth this is remains questionable. I would need to give some considerable thought as to whether I would be happy to invest in a fund which might potentially contain an oil giant such as BP in its portfolio. Putting my money into individual stocks might be a potential solution to this issue.
- Lots of companies involved in green energy production are heavily reliant on government funding and not just private investment. If the government funding is cut for any reason, then there would be a considerable risk of the business folding completely along with any investment. Surprisingly, I’m not a big fan of losing all my cash!
- What is currently deemed the energy source of the future, e.g. wind/solar might suddenly change. In a recent post, I investigated underground coal gasification. With oil and gas prices increasing and the emergence of new technology which makes UCG an affordable alternative, interest in wind/solar/hydro could be scaled back causing share prices in those companies to fall and adding to the inherent risk of any investment.
- Small companies that are to be found in this sector are highly vulnerable to setbacks. So is the risk/reward ratio worth it?
- Many green energy funds, such as the ETFX DAXglobal Alternative Energy Fund (ALTE), may also invest in ethanol. This involves turning food sources, such as corn into bio-fuel. This has been said to lead to price increases in foods such as maize which does not help people living in poverty who rely on staple foodstuffs for much of their nutritional needs. There is much debate surrounding this ‘food vs fuel’ dilemma and I will cover this at a later date.
- Investing in emerging technology is risky. In the last year, two green energy companies, Solyndra and Ener1 have filed for bankruptcy despite huge US government grants. Many private investors lost their money.
Putting my money where my green mouth is?
Weighing everything up, I have decided that I really do want to put some money into promoting a greener future; how, where and what are questions that I still need to answer.
For me, individual shares in one green company might be the way to start out. This way I could fully research the company’s ethics and operations before putting my money into their hands. However, investing in just one company would mean the degree of uncertainty is likely to be higher than that of a fund comprised of several companies.
With a fund, I would either have to look at and evaluate all the companies listed in the portfolio which could take a considerable amount of time or trust the judgement of the fund manager who might have different views to me regarding what does and does not make a green investment. At the moment, I am not entirely comfortable with this.
What is for sure is that there is no reward without risk.
This article is primarily about stock market based investments but there is also the whole topic of green banking which I will cover in a follow-up post.
*I am not giving any financial advice in this post, it is merely my own thoughts on investment and you must do your own research to ensure you are completely comfortable with where your money is going. Remember, the value of your investment could go down as well as up.
Leave a Reply
For every comment you make, I'll offset 30 car miles of greenhouse gas emissions!