No money topic is too big or too small. Welcome to the Mouthy Money Podcast,…
Read More →
Six green investment terms you need to know
Green investment is the big trend of our times says Helena Slater. Here’s what you need to look out for to keep up to date with it.
2020 was the ‘year of green investing,’ with companies shouting left, right and centre about their sustainability records, why they’re ‘ethical investors,’ and what they’re doing to make a positive impact on the world.
And 2021 this trend shows no signs of slowing down.
But with terms like ‘ESG’ and ‘green bonds’ being thrown around, what exactly do they mean?
Below I’ve broken down six of the most popular ‘green’ investment terms you’ve definitely heard of this year, even if you’re not quite sure how or where.
1. ESG
ESG is a term that has grown in popularity over the past year among investors, be they professional or private.
Together, these three letters form a set of standards for companies to use to screen potential investments. The level of scrutiny that companies use to examine can vary, but these have undeniably become the foundation to many investments.
The letters stand for:
Environmental. This criterion relates to, as it suggests, environmental factors, such as pollution, deforestation, and biodiversity.
Social. The social criteria of ESG relates to the community, employees, and stakeholders that the company exists within. This can include issues such as race and gender equality.
Governance. This is how a company handles its executive pay, remuneration, and compliance with laws.
2. CSR
Corporate Social Responsibility or CSR is the means by which a company holds itself socially accountable.
This is often looked at from an internal and external basis. As a result, this can encompass anything from promoting diversity in their workplace to ensuring the company has positive environmental impact.
Some companies even go a step further and set up charitable foundations for a variety of causes.
3. RI
Responsible Investment or RI does as it says on the tin. This simply refers to an investment strategy which uses elements of ESG factors in order to make investments that have a positive impact on the world.
In order to demonstrate their commitment to the RI, companies typically file RI reports on their activity on an annual or quarterly basis, which is always a great way to see where companies are concentrating their efforts to help save the planet.
4. Green bonds
Green bonds have grown in popularity over the past year, and there’s a reason for it.
So-called Green bonds are financial instruments that are issued by companies (or now even governments) to raise funds for new or existing projects that benefit the environment.
Since they began in 2007, they have received inflows of over $1 trillion according to the Climate Bonds Initiative, with last year seeing the largest ever number of green bond issuance ($269.5 billion to be precise).
5. Social impact bonds
Similar to green bonds, social impact bonds or social bonds are a financial instrument issued to raise funds for projects with positive social outcomes, whether they be new or existing projects.
Some examples of projects social impact bonds have helped finance include providing educational tools for disadvantaged girls in India and more recently, helping those impacting by the coronavirus pandemic.
6. Transition bonds
Transition bonds are slightly newer to the table than their counterparts. Essentially, these are a means for a not quite so environmentally friendly company to transition to a greener way of doing business.
These bonds have been the source of quite a bit of debate, however, as they enable high carbon-producing companies, such as energy companies, to boost their image to appear more sustainable without making the effort to do so.
For the companies who use transition bonds correctly, these are an excellent way for companies to transition into more climate-friendly business models.
