What are Green Investments?
Green Investments are the investment activity which focuses on the projects or areas that are committed towards preservation of the environment such as Pollution reduction, Fossil fuel reduction, conservation of natural resources, generation of the alternative energy sources, project related to the cleaning and maintenance of air and water, waste management or any other type of environmentally-conscious practices.
The green investing funds can be raised by private equity firms, corporations, hedge fundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques.read more, or even individuals. Some green investment option with the investor includes securities, electronically traded funds, mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more, and bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually.read more and can be offered by the governments as well sometimes for generating revenue to fund its projects or the businesses.
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Example of the Green Investments
source: Reuters.com
Green investments can be in the form of securities, electronically traded funds, mutual funds, and bonds. For example, the Green bond issued by the company Apple worth $ 1.5 billion was the first-ever green bond which was issued by the technology company, and the same was highly popular. The bond even won the award by Environmental Finance in the year 2016.
Another example of the green investment includes the sustainability bond issued by Starbucks with the motive of sustainable agriculture improvements, which also gained high popularity.
Advantages of Green Investment
There are several different advantages of the Green Investments, providing the opportunity for the investors as well as for the company raising funds through these investments.
- One of the main advantages of the green investment to the companies raising funds through the means of green investment includes the fact that company can get the funds from the public through this which are much needed for the sustainability-related projects because sustainability departments often operate with the lean budgets in the company and the company’s involvement for the cleaner future might require the upfront investments of a significant amount. So, for this purpose, green investment is very helpful for companies.
- The public now a day has an awareness of the requirement of protecting the environment so, when any person issues a green bond, then it tends to have a good amount of attention of the public, which makes it easier for the companies to raise funds. Also, the companies get recognition in the general public for their innovative approach to sustainability, which in turn is beneficial for the company only.
- From the perspective of the investor, green investments are beneficial because many of the green investment instruments are exempted from the taxExempted From The TaxTax-exempt refers to excluding an individual's or corporation's income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only.read more, such as the green bonds.
- Along with the other benefits, these investments also provide personal satisfaction to the investors as they have the satisfaction that their invested money is being used in a responsible and positive manner.
- Many of the green investment instruments need to comply with some of the prescribed sets of requirements related to the disclosure, which helps the investors in analyzing that whether their money is being used in the right direction or not by the person who raised funds.
- In green bondsGreen BondsGreen bonds are a particular type of financial markets bonds with all the characteristics and payout structures of fixed income financial instruments. However, their end-use is dedicated to environmental and climate change projects that aim to develop renewable energy resources and pollution minimization.read more, when the demand is high, then there will be low borrowing costs, which will reduce the overall expenditure of the company. This reduction of the expenditure will then pass to the investors only in the form of dividends providing benefits to them.
Disadvantages of Green Investment
There are some of the limitations and drawbacks as well of the green investments along with the advantages which are as follows:
- From the perspective of the investors, investing the money in the green companies might not be a great deal than investing in another type of equity strategies because many of the companies in the present world are in the phase of development having low revenues and the high valuations of their earnings making it riskier for them to make the investment.
- As the market of the green investment is small, entry and exit in those instruments is not easy when compared with the more popular investments. Due to this, there is a lack of liquidity in green investment, and the investors cannot withdraw their money as and when required, and it is also not easy to sell those instruments, and thus investors have to hold the same till the maturity.
- Many of the times, there is a lack of clear definition of the green or the purpose for which the money will be invested by the issuer of the investment instrument. Due to this, the investors investing might not exactly know that in which area their money is being used, which means that it is probable that their money could be used for the wrong reasons as well.
Important Points
All the investors investing in green investments should be aware of companies that simply raise funds as green investing for the purpose of branding only and do not follow the steps which were promised initially by them at the time of raising funds. So the current, as well as the potential investors, should research in a proper way before making any investments about the companies, green fund prospectus, and other parameters such as annual filing of the stock. After analyzing, they should see whether investment includes companies that fit in their personal definition or area.
Conclusion
Green investments are an investment which includes securities, electronically traded funds, mutual funds, and bonds in which person issuing the instruments are involved in operations which have the ultimate aim of improving the environment. It can be any company, whether it is involved in the development of alternative energy technology or the company that has the best environmental practices etc. Under this, the funds are allocated towards those projects which work for the benefit of the environment.
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