What are Green Stocks?

Jul 17, 2018 | BEGINNER, INVESTING 101

Green stocks are shares of ownership in companies that do business in environmentally friendly ways. These companies tend to be involved in activities such as developing alternative energies, reducing carbon footprints, controlling pollution, and recycling. While firms that are prominent in their industries and have proven to be perennially profitable are called “blue chips,” green stocks, which are also known as “green chips,” come with significantly higher risks.

Despite these risks, green stocks are attractive to investors who are environmentally conscious and want to support the growth of businesses they see as being more responsive to earth-friendly priorities. However, although investors tend to be willing to take on the risks of green stocks during bull markets, they are also apt to abandon them during bear markets. This trend was observed in 2003-2007, when high oil prices spurred keen interest in alternative energy and made these green stocks elite performers.

The good times came to a screeching halt as the Great Recession hit in 2008-2009. When traditional energy prices plummeted to dirt cheap levels, demand for alternative energy likewise sank and took green stock prices with it. This inherent volatility for green stocks is exacerbated by the sector’s relative dependence on the availability of government subsidies.

Investors who are willing to weather the risk and volatility that come with green stocks may eventually be handsomely rewarded. Since the end of the Great Recession, green stocks have rebounded nicely along with the broader market. To the extent that historical momentum appears to be on the side of environmentally friendly businesses, it is reasonable to expect the future to be bright for their market performance.

While risk and volatility have to be weighed carefully in investing decisions, investors interested in green stocks now have more options than ever. As they have performed well in the market, green stocks have been increasingly included in mutual and exchange-traded funds, and many funds hold green stocks exclusively. This surge of interest has been fueled by both investors who believe in the morality of green investing and those who consider more conventional businesses to be economically and environmentally unsustainable.

Those interested in green stocks will have to decide which specific strategy is right for them. For example, one strategy, known as Fossil Fuel Free (FFF), aims to completely exclude from portfolios any companies that are involved in any part of conventional energy sources, including oil, gas, coal and even nuclear power. However, some investment professionals with solid green credentials argue that investing in the efficient use of fossil fuels is the more realistic way to gradually reduce our dependence on them.

Accordingly, as green investors evaluate their investments, they have to make a call on how much deviation from an ideal standard of greenness they are willing to tolerate. An example of the tension that can occur took place when Brookfield Renewable Energy Partners was removed from the Green Alpha Global Enhanced Equity Income Portfolio. Although the vast majority of Brookfield’s operations are in the area of renewable energy, it did acquire two natural gas plants, which caused it to fall short of the FFF standard.