Green businesses are attracting a growing number of investors. Placing your money in this type of structure not only allows you to participate in protecting the environment, but also to diversify your investment portfolio. However, such an operation involves certain risks that it is important to understand before getting started.
Overview of green companies in the stock market
Having become aware of the threat posed by climate change and the harmful effects of pollution on the environment, more and more companies have integrated ESG (environmental, social and governance) criteria into their economic model. This situation multiplies the possibilities to invest in the stock market in green finance.
What do we mean by “green businesses”?
A company is said to be green when it implements solutions to reduce the environmental impact of its activity and contributes to the preservation of the planet as well as sustainable development. This type of structure notably ensures that it reduces its ecological footprint by limiting its greenhouse gas emissions. It also seeks to minimize its waste and deploys a real recycling policy. In addition, it applies measures to reduce its water and energy consumption as well as to increase its energy efficiency.
A green company is also committed to respecting human rights as well as the fair and equitable treatment of its employees, suppliers and business partners. In addition, it strives to promote gender equality, comply with laws and regulations and improve the well-being of the communities in which it operates.
Typical market profile of a green company
There are different types of green businesses:
● Those who use renewable energies (solar, hydraulic, wind, etc.) to carry out their activity. These companies contribute to the energy transition and actively participate in the fight against global warming;
● Those that produce environmentally friendly products. These companies provide access to a sustainable alternative to non-ecological products;
● Those who engage in sustainability projects. These companies help create a more sustainable future.
Investment Opportunities in Green Businesses
Investing in green companies offers real opportunities. These are explained below.
Growth potential and driving factors
Ecological issues are among the major concerns at the moment. In this context, consumers are increasingly favoring companies that care about the environment. At the same time, they are gradually turning away from those which do not make efforts in favor of ecology.
Green companies therefore have enormous growth potential. It turns out to be wise to invest your money, especially as eco-responsible ETFs (stock exchange-traded funds that include several stocks) multiply and public policies attach increasing importance to sustainable finance.
Navigating environment-focused indices and funds
Investing in green companies allows you to navigate famous stock market indices such as:
● The Dow Jones Sustainability Index (DJSI). This is a set of indices measuring the performance of a company in terms of sustainability;
● Euronext Low Carbon 100 Europe. This stock market index is made up of 100 European stocks selected on the basis of ESG criteria;
● Euronext CDP Environment France. This index brings together the 40 best-rated French companies in terms of respect for the environment.
Furthermore, it is possible to invest in green companies through funds focused on the environment such as those labeled SRI (Socially Responsible Investment) or Greenfin.
Challenges and considerations for investing in green
Green investments are undoubtedly more beneficial for the environment than traditional investments. However, they are not completely infallible.
Understanding the risks associated with green investments
Less diversification is one of the main risks of green investments. Indeed, certain stock market indices dedicated to the environment only list 400 stocks, compared to 1,600 for their traditional version. It also happens that green investments do not produce the expected returns and cause financial losses.
Importance of due diligence and sustainability assessment
Consisting of carrying out a set of checks, due diligence is essential before investing in a green company. Particular attention should be paid to the risks associated with ESG issues. On the other hand, it is essential to assess the sustainability of the company. More precisely, this criterion must be analyzed on environmental, economic and social levels.
