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green investing

Hello, and welcome back to Green Investing 101.

This week, it’s me, David Berman, back with another look at environmentally responsible investing. This week: How green should you get?

Let’s get started.

ALLY JAYE REEVES

Getting started guide

In this issue, we’ll cover:

  1. How green do you want to get?
  2. Diversification and DIY
  3. Investing beyond stocks

We’ll start with the foundations of green investing, by looking at big-picture concepts likediversification. Then we’ll explore your options for investing, which range from one-stop purchases that are ideally suited to novices to individual equities and funds that might require some risk tolerance. We’ll even take a peek at investments beyond the stock market.

How to get started with green investing

Green investing doesn’t have to be a difficult endeavour, and it certainly doesn’t have to mark a radical departure from regular investing – especially if you’re okay with buying baskets of stocks and bonds rather than individual securities.

The first question to ask yourself is: How green do you want to get?

Going full-green means that all your investments are tied to companies that have embraced environmental practices. That might make you feel good about your contribution to the health of the planet, but you might run into unwelcome volatility if your investments lack diversification.

  • Canadian renewable energy producers have strong green credentials because they tend to develop hydro and wind power globally.
  • There is a lot to recommend here, too, because many of these companies show consistent profit growth and rising dividends.

However, their share prices are exposed to interest rates, foreign exchange, regulations and government policies toward renewable energy – not to mention fluctuating investor interest.

The bottom line: Putting too much money to work in this one sector could rattle your nerves.


Don’t go all-in. Here’s what to do instead

There are plenty of opportunities to add diversification, while remaining true to your sustainability goals.

Indexes that track companies that score relatively well on ESG are sprouting up with a wide variety of stocks in them – giving investors plenty of choice as funds track these indexes.

  • One example: S&P Dow Jones Indices launched its S&P 500 ESG Index in 2019. There are currently 314 stocks in the index, drawn from 11 sectors – so it includes everything from technology stocks to financials to energy producers. Companies involved in thermal coal, tobacco and controversial weapons (such as landmines) are excluded from the index.

But keep in mind: A good ESG score can also come from executive diversity and strong labour standards, so some airlines, car manufacturers, oil producers and miners make the grade.

The performance of the index is in line with the broader S&P 500, which means that investors aren’t sacrificing returns here. Over the past 10 years through Aug. 31, 2021, using historical data, the ESG index delivered an annualized average return of 16.7 per cent (including dividends), or slightly better than the 16.3 per cent total return for the S&P 500 over the same period.

The bottom line: Can you buy an investment that tracks this index? Absolutely. Should you? This is where things get interesting.


Professional help or the DIY route

Some investors may want the direction of a professional stock-picker, who can attempt to drive strong performance by selecting the greenest and most promising stocks. For these investors, ESG or green-focused mutual funds may be the best approach, if you don’t mind paying a fee.

Do-it-yourself investors can buy ETFs that track baskets of stocks, such as the S&P 500 ESG Index or a number of alternatives. Some of these funds, which trade like stocks on exchanges, are focused on clean energy specifically and can add international diversification.

ETFs tend to be passive – most are not led by stock-pickers – and they can benefit from very low fees. While passive funds won’t outperform a benchmark (since they track one), they won’t underperform it either. That can be calming.

You can also bypass funds altogether and buy individual stocks, of course, eliminating all fees except your trading costs (if any).

  • The benefits: You gain full control over what you deem green.
  • The downside: You’re probably not a pro, so be prepared for some missteps. Green companies are still companies, and not immune to accounting shenanigans and failure, let alone dismal performance.

Remember: There are many ways to invest. You can pick stocks or a hire a professional to help. It’s entirely up to you and depends to some extent on your risk tolerance. And keep in mind that you can always try a combination – starting with a diversified fund and then taking some risk on a stock.


Investing beyond stocks

It’s not just stocks: Green bonds are becoming a massive asset class, beckoning investors who want to own corporate and government debt that backs sustainable projects.

  • According to Refinitiv, the total value of green bonds issued in Canada in the second quarter of 2021 rose to $4.9-billion, a record, and up from $2.6-billion in the first quarter.

Canada is just a small slice. Globally, green bond issuance in the first half of 2021 reached US$227.8-billion, approaching the full-year issuance in 2020, according to the Climate Bonds Initiative.

Add social and sustainability bonds, sustainability-linked bonds and transition bonds to the mix – which broaden the category to include, for example, a traditional energy company that is building a wind farm – and total issuance in the first half of 2021 was US$496.1-billion.

That’s a big deal, and hard to ignore when you want a green investment portfolio. The best bet here? Get instant diversification through a mutual fund or ETF.

The bottom line: Climate-conscious investors will tell you: Green is good. Now, green can be diversified too.


Key takeaways

That’s it for week two of this course. Here are three key points to remember:

  1. Figure out how much of your portfolio you want to be green.
  2. Assess your investing acumen. New to the game? Try a diversified fund that either tracks an index or is led by a pro.
  3. Think beyond stocks. Green bonds are becoming a big part of green investing.

Pop quiz

How much money, in total, have investors, put into the iShares Global Clean Energy ETF, the world’s largest green ETF?

  • US$136.5-billion
  • US$6.5-billion
  • US$2.5-billion
  • US$10.5-billion

Keep going!

Now you know some of the basics of green investing, it’s time to put them into practice:

Thanks for reading. If you took action using tips from this newsletter, let us know using #GlobeGreenInvesting on social media or e-mail us with the subject line Green Investing 101. We would love to hear from you.

How does the energy transition affect your investing journey? That’s up for discussion next week.


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What else we’re reading


Pop quiz answer: Investors have put a total of US$6.5-billion into the world’s largest green ETF.