In recent years, socially responsible investing has gained importance among market participants worldwide. There has been an increase in the number of those who have become socially conscious and want their investments to go to businesses that acknowledge the relevance of environmental, social, and governance factors to doing business. Green investment is considered a subset of socially responsible investment that focuses on the environmental aspects of businesses.
Green investors analyze companies based on their policies pertaining to green technologies, climate change, greenhouse gas emissions, renewable energy sources, waste management, pollution control, water management, natural resource conservation, deforestation, etc. Risks associated with these environmental aspects are looked into, and the company’s management of these risks is assessed. Green investors believe that it is important for companies to manage these risks to remain relevant in the long run.
India has aligned itself with this global trend and has become more sensitive toward the environmental aspects of doing business. India’s decision to ratify the Paris Climate Change Agreement at the United Nations is proof that the country has become sensitized to environmental issues. The Indian government has mandated that all companies must spend 2% of their annual net profit on corporate social responsibility activities every year. This is a major step to promote corporate participation in social causes. The government of India has also set an ambitious target of building 175 gigawatts of renewable energy capacity by 2022, which will require intensive fundraising. The government alone cannot finance the green infrastructure initiatives; corporations will also have to participate and support the government on this front. Many financial institutions and banks have already issued green bonds in India, which have been accepted well by green investors. The Securities Exchange Board of India is also looking to come up with regulations to promote the issuance and listing of these green bonds. Government initiatives like these could help in the growth and popularity of green investments in India.
The “Green Investor Brigade” is also looking for green investment avenues in capital markets. Equity investment can have an active approach, in which the fund managers actively select companies that they consider to have relatively better green standards. Another way is to adopt the passive route, in which investments can be made in ETFs or structured products that replicate or are linked to indices. These indices are constructed with a focus on green objectives. Investing in index-linked products seems to be preferred globally, as leading index providers like S&P Dow Jones Indices have a scientific and rule-based methodology for selecting stocks to create these indices. Further, passively managed products are cost effective, as they have a low asset-management fee.