Green Funds

A green fund refers to a mutual fund or alternative investment vehicle exclusively targeting companies considered socially conscious or actively engaged in promoting environmental responsibility.
Green Funds
3 min
07-June-2024

Green funds invest in environmentally responsible or socially conscious companies. They include mutual funds, green bonds, and impact investing funds. The need for corporate social responsibility, growing awareness of climate change, and changing laws that support sustainable company practices have all contributed to the recent surge in the popularity of green investing.

Green funds, sometimes referred to as eco-friendly or sustainable funds, are investment vehicles that prioritise businesses and initiatives that support environmental sustainability.

This blog delves deeper into the idea of green funds and their importance and outlines their benefits.

What is a green fund?

Green funds are mutual funds or other investment vehicles that support corporate practices and policies that are socially and ecologically sensitive. Green funds have the potential to invest in businesses that promote sustainable living, alternative energy, and green transportation.

Investors can match their financial goals with their social and environmental beliefs by making investments in green funds. These funds seek to support international efforts to mitigate climate change, protect natural resources, and promote sustainable development in addition to providing competitive financial returns.

The market for green investments has grown quickly worldwide, and the amount of assets under management (AUM) in sustainable funds has reached an all-time high. While the evidence is not compelling, green funds seem to be able to match the profitability of standard funds. This expansion is a reflection of the growing interest of institutional and individual investors in investment possibilities that have a positive impact on society and the environment.

Understanding green funds

A green fund’s portfolio is based on Environmental, Social, and Governance (ESG) criteria and may base its investing strategy on any or all of the following attributes:

  • Selecting businesses that promote environmental causes and want to cut down on energy use
  • choosing businesses that place high importance on fostering relationships with their staff, clients, and the community (aspects such as human rights, fair labour practices, and gender inclusion)
  • Considering a company's transparency, governance style, and presence or absence of a diverse board

History of green funds

Some have stated that the 1990s saw the start of green investment in earnest, at which point investors started paying more attention to the damage companies or entire industries were causing to the environment.

After environmental catastrophes like the Exxon Valdez oil spill attracted international attention, green investing got going in the 1990s.

Some investors believed that these companies not only operated more ethically but also had a competitive advantage over those that had the means to lessen their environmental impact. Others believed that it was morally required to invest in companies and technologies that may help create a sustainable society by using renewable energy sources.

Types of green funds

Green funds encompass a diverse array of investment vehicles tailored to meet the varied preferences of investors. Here's a summary of common types:

  • Mutual funds: These professionally managed funds pool money from multiple investors to invest in environmentally friendly companies across sectors like renewable energy and sustainable agriculture.
  • Exchange-traded funds (ETFs): Green ETFs trade on stock exchanges, mirroring an index of eco-friendly companies or projects. They offer a cost-effective way to access sustainable investments with intraday liquidity.
  • Green bonds: These fixed-income securities finance environmentally friendly projects like renewable energy and pollution control. They often come with tax incentives, appealing to environmentally conscious investors.
  • Socially responsible investment (SRI) funds: SRI Funds consider environmental, social, and governance (ESG) factors in their investment decisions. They avoid companies with poor ESG performance and controversial industries, favouring those with strong ESG practices.
  • Environmental, social, and governance (ESG) funds: ESG Funds integrate ESG criteria into their investment strategies, emphasising companies with robust environmental stewardship, social responsibility, and corporate governance practices. They take a holistic approach to evaluating investments, differing from SRI funds by considering a broader range of factors.

Performance of green funds

Examine the green fund's past returns and performance in comparison to its benchmarks and peers. Although historical performance does not guarantee future outcomes, it can offer important insights into the fund's ability to generate competitive returns.

Are green funds profitable?

Although green investing aims to achieve more than just profit, some research has shown that funds that meet ESG standards offer returns that are comparable to or higher than those of more conventional funds.

How much has been invested in green funds?

The subjective nature of the word causes estimates of the overall portfolio value of green funds to differ greatly. The Forum for Sustainable and Responsible Investment estimates that in 2020, assets managed by registered investment businesses that adhere to ESG standards, including mutual funds and index funds, totalled $3.1 trillion.

What do green funds invest in?

Green funds provide investments in the efficiency, construction, and renewable energy industries. Solar, wind, battery, and energy storage technologies, along with the materials that enable these technologies, are all included in the wide category of renewable energy.

Whether a building is being used for residential, commercial, or office purposes, the building industry comprises builders who use energy-efficient materials, reducing the carbon footprint of each project.

Conclusion

The surge of green funds marks a pivotal shift in the financial realm, where investors are increasingly acknowledging the urgency of addressing climate change and fostering sustainable development. These funds represent hope, offering avenues for investment that not only promise positive environmental and social impacts but also deliver robust financial returns.

Investors are now gravitating towards green funds, drawn by the promise of contributing to global initiatives aimed at combating climate change and preserving natural resources. These investments serve as tangible manifestations of investors' commitment to aligning their financial pursuits with their environmental and social values.

Moreover, the allure of green funds extends beyond mere altruism; they present lucrative opportunities in a rapidly evolving market. As the world pivots towards sustainability, these investments position themselves at the forefront of innovation and adaptation, offering the potential for compelling financial gains.

The Bajaj Finserv Mutual Fund Platform features multiple tools, from an online lumpsum calculator to SIP calculator, intending to make mutual fund investment planning easier. Additionally, the platform also offers over 1,000 mutual fund schemes in various categories. You can compare various options using the dedicated mutual fund comparison tool to see which one best fits your needs.

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Frequently asked questions

What is the meaning of green fund?

Green funds are mutual funds or other investment vehicles that support corporate practices and policies that are socially and ecologically sensitive.

Why are green funds important?

Green funds are important because they help investors align their financial goals with their environmental and social values.

Who benefits from green finance?

Investors, businesses, communities, governments, and the environment all benefit from green finance. It provides opportunities for investors, helps businesses implement sustainable projects, creates jobs and improves public health in communities, assists governments in achieving environmental goals, and contributes to mitigating climate change and conserving resources.

Who is responsible for the green fund?

The responsibility for green funds lies with the organizations or entities that create and manage them. This could include governments, specialized financial institutions, private investment firms, banks, or philanthropic foundations. They establish and oversee these funds to finance environmental initiatives, sustainability projects, or other environmentally friendly endeavours.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.