Approaches to Green Investing

‘Green investing’ can best be understood as investment activities aligned with environmentally conscious goals like conservation, alternative energy, food supply, air quality, and clean water. In this way, a green investment strategy may incorporate elements of other strategies like Environmental, Social, and Governance Investing (ESG), Socially Responsible Investing (SRI), and impact investing but not fall into one of those distinct categories.

For investors seeking to implement an investment approach that prioritizes positive environmental impact, it is important to understand the distinctions inherent in these various strategies.

Environmental, Social, and Governance Investing (ESG)

Though ESG is often mentioned in the same breath as green investing, it’s crucial to understand that the “E” is just one part of the equation. The overall composition of ESG funds includes social and governance considerations in addition to environmental ones. A green investment strategy may consider allocations to funds that prioritize ESG as a qualifying factor but would weigh the fund’s environmental impact above the social and governmental dimensions.

While the environmental, social, and governance factors receive significant weight in the asset allocation of ESG-focused strategies, investors will ultimately be concerned with profitability. Therefore, these factors will be considered relative to and alongside traditional financial measures.

Socially Responsible Investing (SRI)

The goal of SRI is to avoid funding companies that cause more harm than good within their particular industry. In this way, SRI is distinct from other sustainable investment strategies and resembles the divestment efforts of anti-apartheid movements. SRI-minded investors exclude companies based on conflicting values instead of seeking companies that align with their values.

This strategy may be employed by individual or institutional investors hoping to push companies to adopt more sustainable policies and practices. It is also a tactic leveraged by activist shareholders. These shareholders work to ensure that the companies they have already invested in adhere to certain value sets. This may tie into a company’s policies and practices, but it may also be directed toward a company’s investment portfolio.

With climate change weighing heavily on many investors’ minds, it is no surprise that many SRI investors often refer to green investing as a form of SRI. While this is not an unfair association it is important to keep in mind that investments referred to as ‘socially responsible’ may be tied to particular social justice topics and movements.

Impact Investing

In contrast to SRI, impact investing seeks investment opportunities that correlate with an investor’s ethics and generate social good. While individual and institutional investors may adopt an impact investing strategy, the term is most frequently used in relation to private equity funds.

When considering an impact investment, investors will use the United Nations’ 17 Sustainable Development Goals as a guide. Though like with any investment, the goal is to generate a return, impact investments may provide a below-market return or target a risk-adjusted market rate supplemented by exposure to asset classes like fixed-income or index funds. Instead of investing solely in public equities, investors might contribute to community development projects or poverty reduction initiatives.

The most significant consideration when taking a SRI approach is the measurable impact of the investment. Impact measurement uses qualitative metrics associated with the defined goal in addition to financial returns. Such measures may include the number of schools built or the number of meals provided in a low-income neighborhood.

For those seeking investments that align with a particular value, but may not be willing or able to commit to an overarching strategy that prioritizes it above all else, there are many individual investment products available to gain some exposure to sustainable industries and those working toward positive environmental and societal impact.

[Editors’ Note: To learn more about this subject, watch Bankruptcy Intersections: Environmental, a free on-demand webinar. 

This is an updated version of an article originally published on January 11, 2023 and previously updated on October 11, 2024.]

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