Recent years have seen more and more investors – big and small – demanding that their money is invested in companies that help, rather than hurt, the environment.

Ethical investing is nothing new. Whether that be Sharia-compliant investments that are compliant with Islam, or the Methodist movement urging its followers to avoid investments in alcohol or tobacco companies, many have been applying a moral compass to their investments for centuries.

There are multiple terms around this type of investment, sometimes used interchangeably and often confusing, such as ethical investing, impact investing, sustainable investing, socially responsible investing and Environmental Social and Governance investing (ESG).

So, what do we mean by green investing? According to Amit Boura, CEO of the Global Impact Investing Network (GIIN), these sorts of investments “drive a positive, measurable impact on climate change and generate a financial return.” Often, Boura says, these types of investments are off the radar for many investors. He gives a number of examples, including large-scale renewable energy, and clean energy access “for people who live off the energy grid by investing in sectors like household solar and access to clean and renewable sources of energy.”

These sorts of investments are possible across a wide array of sectors, including Boura says “natural capital solutions investments into sustainable forestry, agriculture, conservation finance, and the blue economy.”

“Scaling new climate technologies and innovation is an important area for impact investors,” Boura adds. “There’s a huge need to seed innovation today to invest in the new technologies we will need tomorrow if we’re going to operate our global economy and support a healthy society at scale in a way that’s sustainable for the planet.”

Investors can put their money into individual companies or invest in mutual funds, index funds or exchange-traded funds (ETFs), all of which have specific ESG funds. While not all these funds are focused on the climate – some are focused on social and employee responsibilities – they all have, in theory at least, met a certain level of ethical criteria.

And as of December last year, according to the Harvard Business Review, global ETF “sustainable” funds had more than $2.7 trillion in investments, with more than $143 billion in new capital flowing into these funds in the fourth quarter of 2021 alone.

Investors need to be wary however. Researchers at Columbia University and London School of Economics analysed the ESG record of US companies in 147 ESG fund portfolios and in nearly 2,500 non-ESG portfolios. They discovered the companies in the ESG portfolios actually had worse compliance records both for labour and environmental rules. They also found that companies added to ESG portfolios did not improve compliance with labor or environmental regulations.

Another study last year by InfluenceMap revealed that 71 per cent of the 593 ESG funds studied failed a test to determine whether or not they were aligned with the Paris Agreement global targets. And 55 per cent of the 130 specifically ‘climate-themed’ funds also landed negative Paris Alignment scores.

Last year, the International Organization of Securities Commissions (IOSCO) found there was very little transparency in methodologies for rating of ESG funds, while also highlighting the potential conflict of interest where consulting companies provided ESG services to companies as well as produced ratings or data products incorporating the same companies.

So, how can investors ensure that the companies they are investing in are doing things that benefit the planet, and not just engaging in greenwashing? “We encourage all investors to lean into the core characteristics of impact investing,” Bouri says. He recommends looking for a number of key principles in potential investors.

“Intentionality: investors must set targets or goals that they hope to achieve through their investments; Use evidence and impact data in investment design: Investors must ensure those goals and targets can be backed up by data and evidence; Manage impact performance: Investors need to measure and monitor the progress of their investments. Are they conducting due diligence when looking at new opportunities? How do they measure their success and performance?”

Of course, given the complexity of financial products, such due diligence is not always possible, which is why proper regulatory frameworks are important.

Finally, Bouri says that investors must also demonstrate how their commitment is contributing to the broader green energy movement. “For example, are they contributing their data and information to help the wider industry identify the right solutions?”

The momentum towards greener investments seems to be unstoppable. In 2020, The European Commission announced its Green Deal, which aims to move €1 trillion in assets into green portfolios. As part of this, every fund in Europe will have to disclose information on its ESG impact regardless of whether it is a green fund or not. The Sustainable Finance Disclosure Regulation will also ensure that companies have to formalise the disclosures around green investments.

The growing fossil fuel divestment movement has seen more than $14.5 billion divested from fossil fuel companies, with institutions such as Harvard and Norway’s sovereign wealth fund committing to no longer invest in fossil fuels. 

With regulations getting stricter, public appetite growing, and more and more institutional investors demanding sustainable investments, it seems a matter of time before green investing is the norm – whether that happens quickly enough to avert the worst effects of the climate crisis remains to be seen.