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These days there are plenty of funds that market themselves as being "socially responsible" by investing only in the stocks of companies that are green or environmentally responsible.

That's all fine, but I'm wondering if it's just a marketing trick. See, the fund buys shares in the secondary market, i.e. from other investors. This money that I invest, it never actually ends up in the company but rather in the hands of other investors from whom the shares are bought.

So if I invest "responsibly" and pick a green fund, that doesn't actually mean that my money is used for green or responsible projects, correct? It seems like just a marketing trick - if it is not, please tell me phase by phase how my money actually ends up in the use of the so-called green companies.

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You are correct that, barring an equity capital raise, your money doesn't actually end up in the company. However, interest in their stock can help a company in other ways; Management/board members hopefully own shares or options themselves, thus knowing that "green" policies are favorable for the stock price (as your fund might buy shares) can be quite an incentive for them to go green(er).

Companies with above average company share performance are also often viewed as financially healthy and so creditors tend to charge lower interest for companies with good share performance.

Lastly, a high share price makes a company difficult to take over (as all those shares have to be acquired) and at the same time makes it easier for the company to perform takeovers themselves as they can finance such acquisitions by issuing more of their own shares.

There is also the implication that money flowing towards such green companies is money flowing out of/away from polluting companies, for these "dirty" companies the inverse of the previous points can hold true.

Of course on the other hand there is quite an argument to be made that large enough "green" funds should actually buy substantial positions in companies with poor environmental records and steer the company towards greener policies but that might be a hard sell to investors.

  • @lopta88 My pleasure! You would be surprised how many people never realize what the secondary market is. – Koen vd H Mar 4 '17 at 15:55
  • Your last paragraph hints at another reason that you didn't explicitly mention: if the shareholders support green policies, they can vote for board members who support them too. Thus owning shares in a "responsible" company, in theory, allows you (or the fund) some measure of control over ensuring that they continue their responsible policies. – BrenBarn Mar 4 '17 at 20:02
  • @BrenBarn True, I left it out because I couldn't think of a real life instance where that was necessary. – Koen vd H Mar 5 '17 at 10:12
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A share is just a part ownership of a company. If you buy a share of a green stock in the open market, you now just own part of a green company. Just like if you buy a house, the money you paid moves to the former owner, but what you are getting is a clear asset in return that you now own.

Via mutual funds/indexes this can get a little more complicated (voting rights etc tend to go to the mutual/indexing company rather than the holders of the fund), but is approximately the same thing: the fund buys assets on the open market, then holds them, buys more, or sells them on behalf of the fund investors.

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    I know that I own part of the company by buying their share (or a portion of a mutual fund). However, this does not answer my question - by owning part of the company via a fund, how is my investment contributing to greener economy? Someone else still owns the shares of heavily polluting companies, so mere ownership clearly isn't a way of contributing to a greener economy. – lopta88 Mar 4 '17 at 11:49
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    If all the capital and investment moves away from polluting companies to green ones, the theory is it should reduce pollution, as the profits and investment leave polluting industries and they struggle to finance future projects. Green companies can invest in new projects more easily with larger stock valuations/ease of raising capital, which is generally helped by a greater demand for their shares and bonds. If you partake in rights issues, you can also fund projects directly in many cases, as the capital raise will generally have a clear aim for the money being raised. – Philip Mar 4 '17 at 12:04
  • Note that your instincts on the ownership of the remaining pollution companies is largely correct also. Wealth is so heavily Pareto distributed that it only takes a few rich investors to prop up whole companies (or even industries), so the overall picture gets very merky very fast in a system as complex as a capitalist democracy in terms of how much cause and effect these type of funds/actions have. – Philip Mar 4 '17 at 12:07

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