When we think about reducing our carbon footprints, what usually comes to mind are actions like electrifying our home heating systems, driving less, walking and biking more, or using less energy. These are important measures to consider, but another very effective — and often overlooked — way to make a difference is to consider our investments and what our money is supporting.
Whether it’s a retirement account, mutual fund or other investment, our money doesn’t simply stay put. Financial institutions invest and lend money throughout the economy, providing capital to businesses and various projects. Depending on where your money is invested, it can help finance anything from fossil fuel extraction and carbon-intensive industries to renewable energy, energy efficiency or other climate solutions.
Climate investing is an approach that focuses on companies or technologies that are addressing climate change while also seeking financial returns. If you’re considering making changes to your investments, please do your own research and consider talking with a qualified financial professional. That said, the following are some general educational topics you may want to research when exploring your investment strategies.
Three ways to put your money to work for climate
One approach is to choose funds that exclude or reduce investments in fossil fuel companies and other high-carbon industries. The idea is straightforward: rather than providing capital to companies whose business models depend heavily on fossil fuels, investors can move their money elsewhere. The broader strategy is about reducing demand for those investments, limiting exposure to fossil-fuel assets and sending a signal about investor priorities.
Another method is to focus in on businesses and projects that support the transition to a lower-carbon economy. This might include renewable energy, energy storage, electric transportation, energy-efficient buildings, grid infrastructure, water technologies and other climate solutions.
A third way to make a difference is by using your shareholder voice. Owning stock sometimes gives investors certain rights, including the ability to vote on shareholder resolutions and possibly participating in other forms of corporate engagement. Investors and asset managers can use those rights to push companies toward greater climate disclosure, emissions reductions and other changes. Some sustainable funds emphasize this strategy rather than simply excluding companies from their portfolios.
‘Green’ can have different meanings
There is no single definition of “green” or “sustainable” so a bit of extra research can be useful when you hear these terms. For example, two funds with similar names can use very different investment strategies.
To illustrate the variety of options that are classified as sustainable, a quick search of a large investment company’s sustainable mutual funds included:
Option A: Companies that are working to remove, reduce or mitigate the effects of climate change.
Option B: Companies helping to deliver safe, reliable and easily accessible water.
Option C: Companies related to alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies.
Depending on what issues are important to you, be sure to explore more information in the description of the fund. The SEC also warns investors about green washing, in which environmental or sustainability claims exaggerate what a product actually does.
Your money is part of your climate footprint
Just as none of us can do every climate action perfectly, there is also no “perfect” way to invest in climate. There are, of course, many considerations that go into smart and focused investing besides climate, such as time horizon, risk tolerance, diversification and individual goals. But by starting to think about the content of your investments, you can take yet another climate action that you may have overlooked.
We often talk about using our money to vote with our wallets when we buy something. Our savings and investments give us another opportunity to put our money where our values are.
Elaine Leahy is executive director of Sustainable Marblehead.
