ESG Investing: 4 Environmentally Conscious Investment Options

4 Environmentally Conscious Investment Options

As an environmentally conscious investor, you might lean into causes you're passionate about or research industries or companies that are working to protect the environment. Those investments may come in the form of companies working to combat climate change or stop deforestation, for example.

Below are four environmentally conscious investment options to consider.

1. Renewable Energy

Renewable energy is powered by natural resources like wind, the sun, water or geothermal resources. The energy these resources provide can be used for home electricity, transportation, heating and more—and that can reduce our dependence on fossil fuels. That's better for the environment and provides a source of energy that naturally replenishes itself.

There are multiple ways to invest in clean energy. One is to invest in companies that make essential parts or technology that powers renewable energy. Another option is to install a renewable energy system in your home. That may include:

• Solar electric panels or water heaters
• Small wind electric systems
• Geothermal heat pumps

An added bonus is that you may qualify for federal tax credits or benefits at the state level.

2. Clean Water

More than 2 billion people worldwide are living in countries that have inadequate water supplies, according to UNICEF. ESG investing can allow you to make a positive difference by:

• Purchasing shares of companies that are focused on ending the global water crisis. That may be through clean-water technology, infrastructure solutions or innovative water treatment approaches.
• Investing in ESG funds that focus on clean water initiatives.

3. Green Transportation

An obvious way to invest in green transportation is to opt for an electric vehicle (EV). Unlike cars that rely on gasoline, electric vehicles do not produce tailpipe emissions. Owning an EV could also lead to significant savings at the pump, especially if gas prices are rising.

Apart from buying an electric vehicle yourself, you can also invest in companies that:

• Manufacture EVs
• Create technology to improve the industry
• Make critical parts or equipment for green transportation
• Support the transition to green transportation

Another option is to buy into a mutual fund or exchange-traded fund (ETF) that invests in these types of companies.

4. Ocean Conservation

There are roughly 5.25 trillion pieces of plastic debris in the world's oceans, according to the National Geographic Society. Add to that tons of other pollutants like mercury, manufactured chemicals, pesticides and human waste. Investing in ocean conservation could help leave a better future for the next generation.

You can consider investing in:

• Companies that are committed to sea life conservation, ocean protection or ending lifecycle product waste
• Businesses that are working to reduce or eliminate ocean pollutants
• Companies that are using eco-friendly technologies like aquaculture

There are also investment funds designed specifically for ocean conservation.

How Does ESG Investing Work?

Now that we've covered some sustainable investment strategies, let's take a closer look at how ESG investing works. The idea is to invest in companies that are aligned with your values and excelling when it comes to environmental sustainability, social awareness and corporate governance. You can do that by investing in the following:

• ESG funds: This includes ESG ETFs and mutual funds, which allow you to buy bundles of different securities like stocks and bonds. ESG funds can help you diversify your portfolio, spread out investment risk, and invest in environmentally conscious companies.
• Eco-friendly retirement accounts: Some 401(k)s offer a self-directed brokerage window that may let you add in eco-friendly investments. You can also use an individual retirement account (IRA) to invest in ESG stocks, mutual funds, index funds and ETFs.
• Individual stocks: You can also buy shares of stock from companies that meet your environmental standards. But it's worth noting that individual stocks are considered high-risk investments—and returns are never guaranteed.
• Startups: Another option is to provide funding to environmentally friendly startups. That may be through crowdfunding platforms, venture capital firms or direct funding provided to the business owner. Investors typically receive equity in exchange for capital. However, it's always possible that the company you invest in won't take off as expected. Evaluating the company's business plan, revenue history and projections can help you make an informed decision.

How to Start Investing

Even if you're new to it, getting started with investing is relatively simple. You can begin with as much or as little as you'd like. From there, compound interest and returns can do most of the work for you. Here's a simple checklist to help you begin:

1. Clarify your timeline and goals. Your time horizon will likely inform your investment strategy. If you're saving to retire in 30 years, you may be comfortable assuming more risk since you have time to recover from periods of market volatility. But if you're investing for a short-term goal, like a down payment on a home, you'll probably take a more conservative approach.
2. Learn how different investment accounts work. Tax-advantaged retirement accounts are one way to invest. That includes IRAs and 401(k)s. You can also invest through a brokerage account. These don't come with tax benefits, but you can expect more flexibility and fewer account restrictions. Another option is a 529 plan, which is a tax-friendly education savings account.
3. Open and fund your accounts. If your employer offers a retirement plan and you haven't already enrolled, you can likely sign up during the annual open enrollment period—or sooner if you've experienced a major life event like getting married or welcoming a child. Apart from that, you can open an IRA or brokerage account on your own through a brokerage firm.
4. Select your investments. Staying diversified is key. That involves holding a mix of investments across different asset classes. Lower-risk investments include certificates of deposit (CDs) and bonds, while individual stocks and real estate carry more risk.
5. Rebalance as needed: Your investments will naturally fluctuate in value. Periodically rebalancing your portfolio can help ensure that your holdings match your risk tolerance and goals. This involves buying and selling different assets to bring things back into alignment.

The Bottom Line

ESG investing is about putting money into companies that share your values, which may include environmental sustainability. That could allow you to grow your nest egg while supporting businesses that are doing good in the world. Just be sure that your strategy is in line with your financial goals and risk tolerance.