Green Fund: What it is, How it Works, FAQs (2024)

What Is a Green Fund?

A green fund is amutual fund or another investment vehicle that will only invest in companies that are deemed socially conscious or directly promote environmental responsibility. A green fund can come in the form of a focused investment vehicle for companies engaged in environmentally supportive businesses, such as alternative energy, green transport, water and waste management, and sustainable living.

Understanding Green Funds

Green funds are investment funds whose portfolio is largely based on Environmental, Social, and Governance (ESG) criteria. A green fund's investment strategy can be based on some of the following characteristics:

• Choosing companies that look for ways to reduce energy consumption and support environmental issues
• Selecting companies that value relationship building with employees, customers, and the community (concerns include gender inclusion, fair labor practices, and human rights)
• Paying attention to how a company is governed, the level of transparency, and whether or not they have a diverse board
  

Based on performance, it is not yet clear whether green funds and socially responsible investing (SRI) can consistently create better returns for investors, but they do represent a proactive step toward environmental consciousness, which many investors see as valuable.

History of Green Funds

Some have citedgreen investing as having begun in earnest during the 1990s, a period where investors were more seriously taking into account the harm businesses or the pressure entire industrieswere putting on the environment.

In the wake of headline-grabbing events like the Exxon Valdez oil spill and protracted fights over logging rights in the Pacific Northwest, a set of investors began to focus their attention and resources on those businesses that were better at managing their environmental impact than more traditional enterprises.

For some investors, these businesses were not only operating in a more ethical manner but also had a competitive advantage over companies who were ill-equipped to reduce their impact on the environment.Others saw an ethical obligation to invest in technologies and businesses that could contribute to building a sustainable society through renewable energy sources.

Types of Green Funds

Green funds invest in areas such as renewable energy, and buildings and efficiency sectors.The renewable energy sector is a broad one, including solar energy, wind, battery, and energy storage technologies, as well as the materials that help make those technologies possible.

The buildings sector includes builders who use energy-efficient materials, making each building's carbon footprint smaller—whether they're being used for commercial, residential, or office use.

Socially conscious investing has continued to gain in popularity, largely due to increased worldwide exposure to the issue of climate change, as well as increased federal funding for alternative energy and other programs. Since 2009, the Green Transition Scoreboard, a project run by Ethical Markets Media, has tracked a cumulative$10.39 trillioninvestedin the green economy through the end of 2019.

Performance of Green Funds

Money has poured into green funds as investors seek both socially responsible investments and returns from the uptick in green technologies such as wind and solar power. According to the Forum for Sustainable and Responsible Investment, there were $3.1 trillion in assets managed by registered investment companies with ESG criteria, such as mutual funds and index funds, in 2020.

Despite sometimeshigh fees, the funds have also garnered relatively solid performance. According to Morningstar, sustainable funds in 2019 outperformed conventional funds, with 66% finishing in the top half of their categories and 35% finishing in the top quartile. The returns of only 16% of sustainable funds finished in the bottom quartile. In 2019, the number of sustainable funds grew to 303 open-end and exchange traded fund (ETFs).