In my last post, I talked about the ecological and social outcomes one might wish to support via green investing. But what about the financial return on investment (ROI)?
Financial ROI (profit) is vital to green investing. This can sound jarring to green-minded folks because for quite a long time, the profits of most businesses have come at the expense of human and ecological health. Yet the underlying system holds much promise. I’m seeing a new generation of green businesses that align profits and green objectives to create powerful engines for economic transformation. These businesses are building the reality envisioned by a previous generation of green non-profit leaders.
Financial ROI is important because it impacts the rate and scale at which this new reality can unfold.
Let’s say two companies are offering comparable solutions to protecting native forest habitat. The company with the higher ROI will most likely have the financial capacity to scale-up their solution, resulting in more forests being protected per investment dollar.
ABC’s: What is Financial ROI?
Financial ROI describes the comparative monetary return of different investments. For example, a bank certificate of deposit paying 4% annual interest will return $4.00 of profit for each $100.00 invested.
In the stock market, the term “price to earnings ratio”, or “P/E” for short, provides a shorthand description of this relationship between the amount invested and the ROI. In the bank CD example, you would have to pay $100.00 (the price) to get $4.00 of earnings (a.k.a. “profits”), or a P/E of 25. All traded stocks are rated by a “trailing P/E” — the current price divided by the previous 12 months’ earnings.
To a green investor, the combination of green values, social values, and the financial ROI, come together to make the complete case for making a particular investment.
Renewable energy stocks, while a volatile group, have been a good investments for ROI. For example, First Solar grew from $28 in Nov 06 to $245 this week. Depending on market conditions, renewables will likely have strong growth over the medium term.