Achi news desk-
Welcome to CB’s personal finance advice column, Make It Make Sense, featuring experts every month answer readers’ questions on complex investment and personal finance topics and break them down in terms we can all understand. This month, Damir Alnsour, lead advisor and portfolio manager on Wealthsimple’s money management platform, tackles eco-friendly investments. Do you have a question about your money? Send it to [email protected].
Q: It’s Earth Month! And… there is a climate crisis. How can I invest in companies and portfolio finance causes I believe in?
Earth Day may have been introduced in 1970, but today it’s more relevant than ever: In a 2023 survey, 72 per cent of Canadians said they were concerned about climate change. Along with carpooling, ditching single-use plastics and composting, you can celebrate Earth Month this year by greening your investment portfolio.
Green investing, or buying shares in projects, companies, or funds committed to environmental sustainability, is a great way to support projects and businesses that reflect your preferences and lifestyle choices. It is growing in favor among Canadian investors, but there are some considerations investors should be aware of. Let’s review some green investment options and what to look out for.
Green Bonds
Green bonds are a fixed income instrument where the proceeds are given to 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 value of green bonds of $11 billion. One caveat: Because it’s a smaller market, green bonds tend to be less liquid than many other investments.
It is also important to note that a “green” designation can mean many different things. And they are not always guided by the environment. Some companies use broad, vague terms to explain how the money will be used, and end up using the money they raised with the bond sale to pay for other non-essential corporate needs. necessarily eco-friendly. There is also the practice of “greening,” labeling investments as “green” for marketing campaigns without doing the hard work needed to improve their environmental footprint.
To make matters more challenging, fund and asset managers themselves can engage in greenwashing. Many funds that claim to be socially responsible still hold oil and gas stocks, slightly less of them than other funds. Or they own shares of the “least problematic” oil and gas companies, thereby tackling 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 hold a mix of stocks and bonds intended to put your money towards projects and companies that work to promote progressive social outcomes or tackle a social issue – ie, investing in companies that don’t damages society. They can include companies that promote sustainable growth, diverse workforces and fair employment practices.
The main difference between the two approaches is that SRI uses measurable criteria to qualify or disqualify companies to be socially responsible, while impact investing usually aims to help an enterprise generate some social or environmental benefit.
Related: Climate Change Influences How Young People Invest Their Money
Some financial institutions use both approaches to build diversified, low-cost, socially responsible portfolios that match the environmental and social preferences of most clients. That 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 that has an SRI designation or says that it participates in impact investing is subjective. There is always a risk of not knowing exactly where and with whom the money is invested.
All three of these options are good reminders that although you may feel helpless to implement environmental or social change in the face of larger systemic issues, your choices can still support the well-being of society and the planet. So, if you have extra money in April (perhaps 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.
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