Green investing: A simple guide for beginners

4 min read | January 25, 2022 07:00 PM EST | By Rishika Raina

Green investing: A simple guide for beginners — Image source: CrizzyStudio, Shutterstock.com

Options for green investing

As discussed above, green investments are beneficial for the environment, but what qualifies as ‘green’ is still debatable. Some investors believe that green investments are investments made exclusively in renewable energy sources and technology that helps in saving energy, while others believe that such investments can be made in businesses that go for environmentally friendly practices and contribute towards environmental preservation while drawing revenue from other sources as well.

There are various ways of investing in green technology initiatives. These include buying stocks in eco-friendly businesses, investing in green bonds, and various instruments like green mutual funds, green index funds, and green ETFs.

Green equities or buying stocks in eco-friendly companies is the easiest way of green investing for environmentally conscious investors. Green bonds or climate bonds, which are fixed-income securities, also help investors to go green by providing their funds to banking institutions, firms, and government bodies for working on environment-friendly projects and fighting the menace of climate change.

On the other hand, green funds like mutual funds or index funds help investors to diversify their portfolio by investing in a basket of securities instead of an individual stock or bond. This is thus a safer bet for green investors and provides them with greater exposure to green businesses.

Rising importance of sustainability

As the negative impact of climate change is being witnessed across the globe, sustainable and responsible investments have gained a lot of importance. According to a report released by the International Monetary Fund (IMF) in 2021, the economic multiplier of green infrastructure investments is around two to seven times greater than the traditional infrastructure investments.

Companies are progressively focusing on corporate social responsibility (CSR) and are trying to perform well on CSR perceptions, which in turn attracts more green investors and leads to the overall growth of the business. As environmentally conscious investors are becoming more aware of where their money is being channelised, the ESG factors have gained a lot of importance in determining a company’s overall performance.

ESG-driven capital allocation can create both monetary as well as non-monetary value for the businesses. It helps in stabilising the share price performance of the company by reducing the risk of volatility and maximising returns while gaining investor confidence, while it also helps in creating non-monetary value by directly tackling the climate change issues through investments in waste reduction and emission cuts. Indices like FTSE4Good Index, DJSI World, and EcoVadis help in measuring the overall impact of sustainable investments.

Conclusion

Investors, who are well informed about climate issues, are concerned about the environment and are thus backing companies with strong ESG credentials. Thus, ESG factors not only have a positive impact on the environment while providing financial gains to the companies, but they also offer higher risk-adjusted returns to the investors. Apart from green equities, investors can make green investments through green bonds and various green funds. Green investing is the future, and it offers an easy way to tackle climate issues, decarbonise the energy setup and transition to net zero, and get maximum returns while contributing positively towards the environment.

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