Green investment funds – a guide to what you need to know to choose a fund

More people are turning to greener, more ethical lifestyles and for many that also means moving their money into green investments.

Here we ask, what are green investment funds? Where do I find them? How do I choose one? And more…

What are green investment funds?

Green investment funds only invest in companies that they consider to be, in some way, environmentally responsible.

This may mean screening out companies (negative screening) that cause environmental harm, such as those involved in fossil fuel extraction.

It may mean only investing in companies that promote environmental responsibility (positive screening), e.g. companies that are involved in renewable energy such as wind farms or solar panels.

Green funds are typically made up of multiple investments in a wide range of companies across different industries, which helps to limit the risk to investors.

However, some focus solely on one specific sector e.g. on renewable energy assets or in energy storage infrastructure. These more specific funds tend to be for more advanced retail investors.

How do I choose a green investment fund?

Here are some simple steps to help you choose a fund.

1. Decide if you are interested in funding something specific (e.g. renewable energy) or are happy to invest more generally.
2. You may also decide to put some money in a green investment fund and leave some money where it is. If you already have investments, you should check the environmental credentials of these.
3. Decide on your financial objectives. You’ll need to see if there is a green fund (or funds) that matches them.
4. Do some homework and research about which investments are truly green (by looking at companies, providers and the funds themselves). Use our guides to ethical funds and fossil free funds as a starting point.
5. Once you’ve found funds that interest you have a look at the most suitable wrappers. Is it a stocks and shares ISA, a pension or a lifetime ISA?
6. Depending on how much you plan to invest it is usually worth speaking to an independent financial advisor. They can give you a professional assessment of the funds and help you decide on the wrapper.
7. Review your investments. Monitor how your investments are doing, quarterly if you can. This will help to ensure you meet your financial goals.

What are the different types of green investment fund?

Impact, ESG and SRI investments

Impact investing, ESG (environment, social and governance), and SRI (socially responsible investment) are different types of ethical investing, all of which can include green investment funds. 

ESG investing uses environmental, as well as social, and governance (ESG) criteria to screen potential investments. ESG funds also consider traditional financial measures in their investment approach, which remain the main driver for such investments, but some ESG funds may be labelled as green.

Socially responsible investing (SRI) sets certain conditions for social responsibility using ESG considerations (and others) and then invests in businesses that meet those standards. This could be using positive or negative screening as mentioned above, some SRI funds will be environmentally focused and considered SRI funds.

Impact investments focus on helping businesses that are doing something positive. They are designed to meet particular goals and this might include environmental goals. Impact investments also tend to take a much longer term view of the investment rather than looking for quick returns. Some green investment funds are considered impact investments.

There is some overlap in the three approaches, but generally ESG investing is the most mainstream approach and impact investing the most ethically focused. However, it is worth assessing the ethics of each different company and fund.

Index components

What is the difference between an active (managed) or a passive fund?

What is an active or managed green fund?

A managed fund has a named fund manager who will screen out companies that do not have strong green credentials and/or look at finding the best green investments on a regular basis.

Companies might be assessed by a fund manager on a number of general factors, such as their transparency. Fund managers will then also look at specific green issues such as their carbon footprint.

Some companies will also be picked because they are actively focused on providing green technology or services such as building wind turbines or solar panels.

What is a passive fund?

You could invest in a “passive” exchange-traded fund (ETF). An ETF is designed to replicate the performance of a stock market index.

According to The Times Money Mentor, “ETFs and tracker funds are cheaper than active funds because an investor isn’t paying for the stock-picking skills of a fund manager to buy and sell investments.” 

A green ETF will typically filter out those companies on an index that are involved in certain activities, such as oil and coal extraction.

It may also tilt the index to focus on investing in companies that perform well on ESG metrics or carbon footprint.

Where do I find green investment funds?

Most financial institutions now offer some kind of green investments. However, it’s important to say that, as with other products, you can find a fair amount of greenwash.  

So-called green funds are often invested in industries you might not expect. For example PensionBee’s green “fossil free pension fund” has investments in companies that provide services to the oil and gas industry.

We cover some of the greenest funds in our guide to ethical investment funds and our guide to fossil free funds.

Are green savings accounts a good alternative?

If you don’t have money to risk in a stocks and shares type investment fund, a green savings account may be a good alternative.

These are likely to be much lower interest (especially over the long term) but offer a safe option.

Depending on which account you choose you can also be sure that your money won’t be invested in any environmentally damaging projects.

See our guide to savings accounts for some examples.

Are green funds popular?

The Green Transition Scoreboard, a project run by Ethical Markets Media, suggests $10.39 trillion has been invested in the green economy over 10 years.

Funds that specifically invest according to ESG principles attracted $71.1bn globally between April and June 2020, according to research firm Morningstar, a 42% increase from 2018.

This takes the total for assets under management in environmental, social and governance (ESG) funds to just over $1trn.

ESG funds represented almost a third of all European fund sales in 2020.

Do green investment funds perform well?

Green funds have performed solidly over recent years. According to Morningstar, sustainable funds in 2019 outperformed conventional funds. 

According to investopedia: 

“66% finishing in the top half of their categories and 35% finishing in the top quartile. The returns of only 14% of sustainable funds finished in the bottom quartile.”

HSBC Research found that in the three months after 10 December 2019 ( the date of the first recorded COVID-19 case in China) – climate stocks outperformed global equities by 7.6 %, while high ESG-rated stocks have outperformed others by 3.7 %.

In a Harvard study it was found that companies with good ratings on sustainability issues most relevant to their industries, significantly outperformed companies with poor ratings on these issues.

Top performing green funds

According to This Is Money, some of the current top performing green funds are:

Read more about green and ethical funds in our detailed guides to fossil free funds and ethical investment funds.