Green Finance explained

We are hearing so much in the media about ‘Green Finance’. But what exactly is it and how does it work?

We spoke to Ivor Bowden from Prudent Environmental Investments to find out exactly what Green Finance and Investments are all about.

Firstly, what are Green Investments?

Green Investments are investments in activities which focus on areas that are committed to the preservation of the environment. They are investments which put money into offerings with positive environmental or ESG credentials and goals. Since May of this year, we have EU legislation regarding Sustainability Related Disclosures which is a first step towards protecting the consumer in their search for meaningful positive investments. Investment managers must screen each companies ESG credentials while considering that company as part of their investment fund. It is not to say the company must be green, more to know what the company is about.

We are presented with so many offerings boasting Green, ESG or Environmentally Friendly credentials and many of these offerings are as stated – good positive examples of what their products is offering.

So how can you tell which is better than the next?

Many products are offered with less than genuine credentials aiming to grab a piece of the market they operate in without making any meaningful contribution to the environment. Greenwashing is a problem within the Environmental field and yet what is acceptable (in terms of a company’s green credentials) to one person, may not be acceptable to another.

There are also different levels of ‘Green-ness’. At one end, we can aim to do less harm (be less bad) while at the other end, Impact Investing has the express aim of making positive change, doing good.

How does a consumer investor find these offerings?

The basic answer? Do your research. I often compare the word ‘Environment’ to ‘Universe’. Both are such enormous topics, it is virtually impossible to understand all facets of it. So firstly you must understand what it is you want to do. What sectors would you like to invest or are you interested in? Renewables? Water? Do you want to do less harm, or ‘only good’?

I’ll use the example of the Oil industry. An oil company has a history of harming the environment. This has been their business model for decades. Then they decide that the future is in cleaner energy. However, changing their model, much like turning an oil tanker around, takes a lot of time and energy. Do you give them the benefit of the doubt and accept that they want to change, that they will make positive impacts in the future with their new revenue sources?

Or do we ‘cancel’ that company because of their legacy business practices? There is no right answer to this. Each person will have their own view and organisations such as charities or NGO’s may have their options restricted further by their documented policies….

Again, research is key. Understanding your own goals and ambitions for the environment is also key.
Thankfully you no longer have to trade off your investment returns for doing good. Much research, including from institutions like Harvard, has shown that returns from companies with positive ESG policies outperforms companies without such policies, all other thing being equal. This is great news for investors dipping their toe into Green Finance or Investing.

The best offering will state what it aims to achieve and make the outcomes measurable. This will make that fund manager or company accountable to its stakeholders including you, its investor.

Ivor Bowden founded and runs Prudent Financial and Prudent Environmental Investments.
He has read extensively and also studied in the area of Green Finance and has been advising clients in this space for over 5 years.

Visit Prudent Financial here

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