Welcome to CB’s personal finance advice column, Make It Make Sense, where each month experts answer readers’ questions about complex personal finance and investing topics and break them down into terms we can all understand. This month, Damir Alnsourlead advisor and portfolio manager on a money management platform simple wealth, addresses green investments. Do you have any questions about your finances? send it to [email protected].
Q: It’s Earth Month! And… there is a climate crisis. How can I invest in companies and portfolios that fund causes I believe in?
Earth Day may have been introduced in 1970, but it’s more relevant today than ever: In a 2023 survey, 72 per cent of Canadians said they were worried about climate change. In addition to carpooling, ditching single-use plastics, and composting, you can celebrate Earth Month this year by making your investment portfolio greener.
Green investing, or purchasing shares in projects, companies or funds committed to environmental sustainability, is a great way to support projects and businesses that reflect your passions and lifestyles. It is gaining popularity among Canadian investors, but there are some considerations investors should keep in mind. Let’s review some green investment options and what we should take into account.
Green bonds
Green bonds are a fixed income instrument whose proceeds are used for climate-related purposes. In 2022, the Canadian government launched its first Green Bond Framework, which saw strong demand from domestic and global investors. This resulted in a record green bond sale worth $11 billion. One caveat: Because it’s a smaller market, green bonds tend to be less liquid than many other investments.
It’s also important to note that a “green” designation can mean many different things. And they are not always so environmentally oriented. Some companies use broad, vague terms to explain how the funds will be used and end up using the money they raised from selling bonds to pay for other corporate needs that aren’t necessarily green. There is also the practice of “greenwashing,” labeling investments as “green” for marketing campaigns without actually doing the hard work necessary to improve their environmental footprint.
To make matters more difficult, funds and asset managers themselves may engage in greenwashing. Many funds that claim to be socially responsible still hold oil and gas stocks, just less than other funds. Or they own shares of “less problematic” oil and gas companies, thereby touting emissions reductions without clearly disclosing the extent of those improvements. As with any type of investment, it is important to do your research and understand exactly what you are investing in.
Socially Responsible Investment (SRI) and Impact Investment
SRI and impact investing portfolios contain a mix of stocks and bonds intended to put your money into projects and companies that work to promote progressive social outcomes or address a social problem, that is, investing in companies that do not wreak havoc on the environment. society. They may include companies that promote sustainable growth, diverse workforces, and equitable hiring practices.
The main difference between the two approaches is that SRI uses measurable criteria to qualify or disqualify companies as socially responsible, while impact investing typically aims to help a company produce some social or environmental benefit.
Related: Climate change is influencing how young people invest their money
Some financial institutions use both approaches to create well-diversified, low-cost, socially responsible portfolios that align with the environmental and social preferences of most clients. That being said, not all portfolios are constructed with the same care. As with evaluating green bonds, it is important to remember that a company or fund having an SRI designation or saying it engages in impact investing is subjective. There is always the risk of not knowing exactly where and with whom the money is invested.
These three options are good reminders that even if you feel powerless to implement environmental or social change in the face of broader systemic problems, your choices can still support the well-being of society and the planet. So if you have extra funds this April (maybe from your tax return?), green or social investing are solid options. As long as you do thorough research and understand some of the limitations, you’re sure to find investments that are good for the world and your finances.