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.

Previously published at GreenOptions.com

In my last “ABC’s” post, I opined about what constitutes a “green” business. Now I want to start looking at “green” investing.

What is an investment? This is such a vital question. There’s a lot of fluff around this term. In the broad use of the word, an investment is anything you put out today in the hope of gaining some benefit later. For example, you might “invest” your time and money planting tomatoes today in the hopes of eating them later.

In business, the word “investment” has a precise meaning. An investment is the point where the interests of an entrepreneur intersect directly with the interests of an investor. The investor moves money (energy, status) into the account of the entrepreneur to support the entrepreneur’s leadership and goals, and to “invest”, to get something back later – not only good deeds, but more money than was provided.

The amount of money that comes back later is called the Return on Investment, or ROI. In finance terms, to be precise, money given without any hope of financial return should be called a gift.

So if you give money to a green charity, you are hoping for a return of good, but not a return of money. If you provide money to an green entrepreneur, you are hoping for both – good deeds and a good return of money. For the purposes of my ABC’s column, a green investment is something that aims to do a lot of good for the environment, like a green charity, but also holds strong potential to provide a financial ROI.

The contract that commemorates a financial investment of money in a for-profit business is called an “investment product”, or even more precisely, a “securities offering document”. These terms provide the foundational understanding of finance, the specifics of how and why a businesses might raise investment capital while complying with the laws that shape the very flow of economy.