What exactly does ‘green investing’ mean? “Green investing refers to investments in companies or projects that seek to mitigate or adapt to climate change, align with environmentally aware business practices and conserve or restore nature,” said , the Luxembourg-based head of Benelux at Fidelity International, an investment firm with $925.7bn in assets under management. “It can take different forms, from investing directly in the shares or bonds of companies building climate solutions like renewables to investing in an ESG fund, which stands for environmental, social and governance, which may be much broader. For example, a company held in an ESG fund may have been selected for investment because it has good governance rather than because it is the most environmentally friendly.”

“Some funds only select those companies such as technology firms that already have low carbon footprints, which arguably does little for real-world decarbonisation,” stated Kevric. “So, investors who buy funds need to look closely at the underlying holdings to ensure they are in fact buying ‘green’ depending on what that means to them.”

“Green investing can deliver financial returns for investors but carries risks just as general investing does,” she said. “It can also narrow the universe of investments that are available, creating ‘concentration’ risk by excluding investments in companies or sectors that may be in transition but are deemed as too high emitting to be included in the portfolio.”

According to Julien Froumouth, head of sustainability at the state savings bank Spuerkeess: “Green investing refers to the practice of allocating capital to projects and companies that either positively contribute to the environment or consider environmental criteria in addition to traditional financial performance. This includes investments in renewable energy, energy efficiency, pollution reduction and conservation of natural resources, or criteria like a company’s carbon footprint or waste management. Green investments can take multiple forms such as green bonds, green investment funds, green loans or equities from companies that are deemed as green.”

Individual investors

Are the sums channelled to the markets by private savers too small to make a real difference? According to Froumouth and Kevric, individual investors actually can contribute to global climate and environmental goals. “Yes, individual investors can make a difference, especially where they invest through funds which pool resources and spread the risk,” said Kevric. “Not only can these funds contribute to investments in climate solutions or support companies with the best environmental practices, but they can also help finance green government bonds.”

“These are bonds issued by a government whose proceeds are used to fund green investment within that country, e.g., install EV charging points or pay for solar farms. A portion of these funds may also go to fund a country’s contribution to the international Green Climate Fund, which was set up under the 2015 Paris Agreement to help developing countries develop clean power and protect themselves against climate impacts. Together these activities help the world make progress towards the goal of the Paris Agreement to keep warming to below 2 degrees.”

“The transition to a more sustainable economy will require investments at unprecedented scale,” observed Froumouth. “Each and every individual effort and contribution is key because the cost of inaction will be much higher as recent events have shown. But the main challenge is to bridge the gap between the true and strong enthusiasm of individuals for green or sustainable finance solutions and their actual financial decisions.”

“The amount of capital that could be mobilised through retail savings and investments is huge but there are barriers to overcome like perceptions of individuals regarding the availability, the profitability and the reliability of sustainable investment,” he said. “Yet, such solutions exist and deliver financial returns while also contributing to the environment.” Spuerkeess, Froumouth noted, has several ESG funds and provides “portfolio management solutions that consider climate, environmental and social factors.”

Is it really ‘green’?

How can individual investors evaluate if an investment is truly ‘green’ or not? “Investors may refrain from investing in green, sustainable or ESG financial products, because of a general lack of trust regarding the effective positive contribution of the financial solutions or due to the complexity to understand what might be qualified sustainable and the effective positive impact of the product,” Froumouth commented. “Therefore, to translate motivations to intentions and intentions into actions, investors must be able to assess first whether a product may be deemed green and to what extent it would fit their sustainability preferences.”

Investors need to look under the bonnet of any fund they buy to ensure that it is investing in the kinds of securities they expect

Sanela Kevric, head of Benelux, Fidelity International

“Given the breadth of approaches to green and ESG investing, investors need to look under the bonnet of any fund they buy to ensure that it is investing in the kinds of securities they expect,” Kevric said. “Looking at the fund’s objective, investment approach and top ten holdings should tell them whether the fund is investing in climate solutions or in companies that are cutting their emissions, or both, or if the fund is taking a low-carbon approach of buying only low emitters or those with little impact or dependency on nature.”

“The EU introduced the Sustainable Finance Disclosure Regulation several years ago to increase the transparency of all EU funds,” she continued. “Funds that claim to be sustainable fall into two categories--article 8 and article 9. Article 8 funds invest in companies that have some sustainable characteristics, while article 9 funds have a sustainable objective, so typically invest in companies that aim to achieve sustainable outcomes that align with that objective. More recently, the European Securities and Markets Authority has introduced fund naming rules to ensure funds more closely reflect their investment approaches, i.e., whether they invest in companies that are already sustainable or those that are on their way to becoming sustainable.

Furthermore, Froumouth said that “investors could rely on ESG labels or ratings delivered by reputable agencies or institutions like Luxflag,” the Luxembourg Finance Labelling Agency. In addition, “investors could access or ask for documentation and reports, or obtain information related to the green or sustainable products made available by their banks or advisors.” At the same time, investors should track “new developments in the sustainable finance field which offer a framework to design innovative solutions to finance the green transition.”

Portfolio manager checks

How do investment managers verify sustainability and environmental claims? “The best practice for investments managers is to work with environmental experts to build clear, customised frameworks for assessing sustainability,” Froumouth stated. “This allows managers to build products with claims that are in line with scientific research.”

He continued: “Once the methodologies are set-up, the investments managers can run their products through specific sustainable criteria and thresholds, aligned with recognised standards, such as carbon emissions [or] water usage. To make sure that the claims are pertinent, the reliability of data, as well as its availability, is crucial. The sourcing must be done carefully, with verifications, to ensure that selected investments are objectively sustainable. For instance, managers can rely on independent third-party audits and certifications validating companies’ sustainable claims.”

“Investment managers have a range of approaches to verify companies are genuinely acting sustainably and doing what they say they do, depending on their investment objectives,” Kevric explained. “For example, an investor who is seeking investments that contribute to real-world decarbonisation might engage with companies in a hard-to-mitigate sector on the following: First, have they set credible, science-based targets for cutting their emissions? Second, do they have a transition plan in place to achieve these targets? Third, how much are they investing to make the plan happen? Fourth, how is progress measured and overseen by the company board?”

“This helps investors understand where companies are on their journey to a low-carbon future compared to their peers, and where specific transition risks lie,” she stated. “Investors may also screen out whole sectors such as oil and gas if they do not meet their criteria of what a sustainable investment is. Others may look more closely at where companies are located and if their supply chains are exposed to physical climate risks, and what mitigation a company is doing to address these.  

Froumouth said that “thanks to increasing regulations to prevent greenwashing, managers need to be more transparent about their definition and assessment of sustainable investments, pushing the industry to be more clear about its claims and its verification process. In Luxembourg, the [financial regulator] CSSF plays a crucial role in supervising the integration of ESG requirements across the financial sector.”

Accessible options

Froumouth and Kevric said there are several accessible green investing options for individual investors, in addition to green bonds. Kevric said they may want to “invest in environmental, climate or nature mutual funds or ETFs [exchange-traded funds], or invest in broader ‘transition’ funds that seek to invest in high [CO2] emitters that are doing most to decarbonise themselves or others or have the most credible pathways.”

Investors could, Kevric said, “Take out a green mortgage and use some of the proceeds to make efficiency improvements to your property or add home generation like solar panels.” Froumouth flagged “green or sustainable savings accounts in which deposits are used to finance green or sustainable projects or companies,” such as plan provided by Etika, a not-for-profit ethical investment firm based in Luxembourg.

Think holistically

“Remember a lot of green investments focus on infrastructure like renewables, which can be exposed to interest rate risk due to high upfront capital costs,” Kevric commented. “So make sure you diversify your green investments as much as possible across different sectors and countries and be prepared for some volatility as policy and regulation continues to change. The energy transition is likely to continue to mitigate climate risks, but there will be plenty of bumps along the way.”

Froumouth said that household investors “now have to express their sustainability preferences to their banker or advisor, as the recent regulatory changes now require a mandatory holistic assessment of such clients’ profile and preferences to recommend compatible products.”