Climate-friendly investing, which is a part of sustainable investing, is focused on how your investments impact climate change.
In this guide, you’ll learn how you can make a real impact by incorporating climate-specific investing strategies into your investment portfolio.
Key Takeaways:
Climate-Friendly Investing Prioritizes Carbon Reduction: This investment approach focuses on reducing carbon emissions in the short-term and long-term..
Multiple Strategies for Impact: There are various strategies to reduce carbon emissions, including negative screening for immediate impact, positive screening for supporting low-carbon leaders, and thematic or impact investing for funding longer-term climate solutions.
Comprehensive Approach: Combining different strategies—like negative screening, positive screening, and impact/thematic investing—can maximize both immediate and long-term environmental impact, ensuring a well-rounded approach to climate-friendly investing.
How to take action today:
Define Your Climate Goals: Start by identifying which climate issues are most important to you, such as reducing carbon emissions or supporting renewable energy. This will guide your investment decisions and help you build a portfolio that aligns with your values.
Begin Researching and Allocating: Look into climate-friendly investment options that match your goals, such as funds focused on low-carbon leaders or renewable energy projects. Begin by allocating a small portion of your portfolio to these investments and gradually increase as you gain confidence.
What is Climate-Friendly Investing?
Climate-friendly investing is an approach that prioritizes reducing carbon emissions through your financial choices.
It involves selecting investments that contribute to the fight against climate change, whether by avoiding companies with high carbon footprints, supporting businesses that lead in climate best-practices, or directly funding projects that offer climate solutions like solar energy or electric vehicle charging.
This strategy allows investors to align their portfolios with their values, driving positive environmental impact while still working toward financial goals.
One of the main climate-friendly investment strategies is called negative screening.
Negative Screening
Negative screening is one of the most straightforward ways to reduce the carbon footprint of your investments. This strategy involves excluding companies or sectors that have high carbon emissions or are heavily involved in fossil fuels. By avoiding investments in carbon-intensive industries like coal, oil, and gas, you can immediately decrease the carbon emissions associated with your portfolio.
For example, Aspiration’s Redwood fund excludes fossil fuel companies while also investing in various leaders across environmental and social metrics. This reduces the direct and energy related carbon footprint of the fund by nearly 50%!
While this approach effectively reduces your carbon exposure in the short term, it’s important to remember that it may also limit the diversity of your investment portfolio. However, for those committed to making an immediate impact, negative screening is a powerful tool.
3 Longer-Term Strategies for Reducing Carbon Emissions
While negative screening is effective for immediate carbon reduction, there are 3 longer-term strategies that focus on supporting companies that are leading the way in reducing carbon emissions or directly funding solutions to climate change.
1. Positive Screening: Investing in Low-Carbon Leaders
Positive screening, as described in in this sustainable investing guide, takes the opposite approach of negative screening by actively selecting companies that are industry leaders in reducing carbon emissions.
This strategy involves identifying and investing in companies that have the lowest carbon footprint within their sector. By supporting these low-carbon leaders, you not only reduce the carbon intensity of your portfolio but also encourage other companies to improve their environmental performance.
For example, you might invest in technology companies that use renewable energy to power their operations or manufacturing companies with highly efficient production processes. Positive screening allows you to back companies that are making significant strides in sustainability, potentially driving broader industry-wide improvements.
2. Impact Investing: Directly Reducing Carbon Emissions
Impact investing is a more hands-on approach to climate-friendly investing, focusing on investments that are designed to generate specific positive climate impacts alongside financial returns. This strategy involves directly funding projects that reduce carbon emissions, such as solar energy developments, reforestation initiatives, or sustainable agriculture practices.
3. Thematic Investing: Supporting Climate Solutions
Thematic investing is another longer-term strategy that focuses on investing in companies and industries that provide solutions to climate change. This approach involves selecting investments that align with specific climate themes, such as clean energy, electric vehicles, green building technology, or water conservation.
For instance, you could invest in companies that produce electric vehicle (EV) charging stations, develop energy-efficient building materials, or create technologies that upcycle clothing materials. Thematic investing supports the growth of industries critical to a low-carbon future, helping to drive innovation and adoption of climate solutions on a larger scale.
Combining Strategies for a Comprehensive Approach
To maximize the impact of your climate-friendly investments, consider combining different strategies to create a more comprehensive approach. For example, you might start with negative screening to reduce your portfolio’s carbon footprint immediately, then add positive screening to support low-carbon leaders, and finally, allocate a portion of your investments to impact or thematic investing to fund direct solutions to climate change.
By diversifying your approach, you can address both short-term and long-term carbon reduction goals, ensuring that your investments contribute to a sustainable future while also meeting your financial objectives.
3 Ways to Get Started with Climate-Friendly Investing
Ready to start making a difference with your investments? Here’s how you can begin building a climate-friendly portfolio:
Define Your Climate Goals: Start by identifying what matters most to you in the fight against climate change. Are you focused on reducing carbon emissions, supporting renewable energy, or investing in sustainable agriculture? Your climate goals will guide your investment decisions.
Research Investment Options: Look for funds or companies that align with your climate goals. There are various climate-friendly funds that can make it easier to get started, like our Redwood fund.
Start Small and Monitor Over Time: You don’t have to overhaul your entire portfolio overnight. Start by allocating a portion of your investments to climate-friendly options and gradually increase your commitment as you become more comfortable with the strategy.
The final word
Climate-friendly investing is more than just a trend; it’s a crucial part of the global effort to combat climate change.
By aligning your investments with strategies that reduce carbon emissions, you can contribute to a more sustainable future while also working toward your financial goals. Whether you’re focusing on short-term carbon reduction through negative screening or supporting long-term solutions with impact or thematic investing, every step you take helps build a greener, more resilient world.