An increased awareness and falling costs has made renewable energies and other green stocks a lucrative option for investors. Clean energy equities have strongly outperformed the S&P 500 over the past three years indicating the decline in fossil fuels is here to stay. Read on to learn more about green stocks and what to look out for before you invest.
Globally environmental awareness has led to the increasing interest in green stocks. Not surprisingly the green energy industry has been on the rise over recent years with greater concern for the environment welcoming more sustainable energy sources and dumping polluting practices.
Investors looking for environmentally responsible yet financially sound investments have a lot to choose from as the sector is growing at an exponential rate. To achieve profit with peace of mind offers green stocks as the perfect investment opportunity.
What are green stocks?
Green stocks are stocks in environmentally conscious companies who offer sustainable products or services. However, how green a company is debatable. Where large hydro-power projects substitute fossil fuel consumption for renewable clean energy, there are huge negative impacts on local societies and ecosystems. Green companies may be anything from a revolutionary product that cleans polluted waters to the best of a bad lot. Not all companies are environmental heroes but still gain the green badge by offering the least environmentally damaging practices in their industry.
Green stocks are often shadowed by renewable energy solutions, yet it is good to bear in mind green nanotechnology and green chemistry sectors also fall under the umbrella. Transforming how products are manufactured and reducing hazardous materials follows a rudimentary transition to a green economy providing hot investment opportunities.
What is greenwashing?
Greenwashing is the practice of appearing more environmentally conscious than in reality. Companies may release a corporate responsibility statement or sustainability policy with vague claims to improve their environmental standpoint, but you must look into the facts and figures to determine whether a company is truly green. Most corporations will divert you from their environmentally damaging practices and instead bring your attention to the few projects that are environmentally friendly. Corporate responsibility is a huge buzzword in which companies spend massive portions of their budgets to sculpt the perfect green image to display to the public. It is all about advertising – there is often a lot hidden under a green exterior.
Greenwashing can seriously affect stock value – if a scam was ever to be exposed then consumers lose faith and go elsewhere where investors start to follow. To try and spot a company greenwashing, look for environmental statistics rather than promises and big budgets that can distract you. The devil is in the detail.
Should I invest in green stocks?
It begs the question whether the success of green stocks is based on its lucrative growth opportunities or whether heightened environmental concern is the reason investors choose this sector. Some investors choose green stocks due their high growth potential and financial success. Whereas other investors choose green stocks out of true concern for the life of our planet. Do your research to look for companies that align with your own personal environmental interests or just keep an eye out for a lucrative balance sheet.
The global economy is slowly switching from greenhouse gas emitting fuels to cleaner, renewable energies. Renewable energy is growing at an exponential rate, comprising 50% of all energy generation by 2024 (according to the International Energy Agency). The brightest future is for solar with onshore wind and hydropower closely following suit. Solar energy is the most affordable, accessible and prevalent type of renewable energy and is now economically competitive to fossil-fuel polluting energy sources! Look out for solar stocks especially as the top grower to buy a greener future.
With Biden as president elect, renewable energy stocks have gained ground and fossil-fuel stocks have slumped with the promise for more green energy legislation. Biden’s greenwave will push alternative energy sources over the next few years under his pledges to “transition from the oil industry”.
Furthermore, green stocks are environmentally friendly companies which have the support of consumers AND governments. Governments can offer subsidies and tax incentives that support the profit of a company. In the UK, the government offered a £24.5 million fund for green business support in 2019 and are said to maintain investment to make going green easier for companies in the future. However, it is difficult to balance government decisions on whether it will help or hinder green stocks. As on the one hand a government may revoke their environmental subsidy and green stocks may suffer, but on the other hand they may introduce high environmental taxes on competitors wrecking their profitability.
Who shall I invest in?
If you are unfamiliar with any green industries it might be best to start investing in a green index such as the RENIXX Renewable Energy Industrial Index or exchange-traded funds (ETFs) such as the Invesco Solar ETF or the iShares Global Clean Energy ETF. This means you invest in a diversified portfolio which will protect you from loss. Alternatively, if you are looking for specific renewable energy companies, then look for high cash flow and strong balance sheets as these companies have greater potential for growth. You could also look at how much capital a company allocates to renewable energy projects that produce high returns. After all, the point of investing is to optimise your returns.
Top green stocks:
- Brookfield Renewable Partners
- First Solar
- NextEra Energy
- Byd Company
There is a huge opportunity for growth in green stocks but you must be careful to look out for a strong balance sheet when choosing which stocks will be most profitable. Want to practice trading before you invest? Download BullBear, for risk-free trading practice.