How to Evaluate Green Investment Options

Going green has been a necessary step for businesses for some time now. Companies have been implementing various green and sustainability practices, supporting environmental initiatives to minimize any adverse effects they may cause on the environment while showing support for the communities. However, going green has evolved and increased its sphere of influence with the concept of green finance or green investing. This necessitates the need for businesses to consider the environmental and sustainable aspects of their financial activities.

In this article, we'll dive into the ever-evolving concept of green finance, discover green investment options, and pave the way to better evaluate them for investors.

What is Green Investment? 

Green investment, also known as sustainable or eco-investing, is the interaction between the environment and organizations' economic activities. It refers to allocating capital toward companies, projects, and financial instruments that promote environmental sustainability, social responsibility, and good governance. To be classified as green investing, the financial activities must minimize negative impacts on the environment and society while generating positive returns. In 2021, green finance hit a market value of $540.6 billion, up from just $5.2 billion in 2012. This exponential, over 100-fold, market growth proves green finance's leading position in the investment sphere and the high demand it receives. 

Green investing is essential for promoting sustainable development and tackling global issues such as environmental challenges, resource depletion, and social inequality. It is known that organizations can influence behavior change by aligning investment decisions with environmental and social goals and supporting the transition to a low-carbon, equitable economy. This means that green investment will become an even more fruitful avenue for companies worldwide seeking not only to be profitable but also to make an impact in the years to come.

What are green investment options?

Green investment and green finance are closely knit with business sustainability, from environmental and social to ethical. Regardless of the area of sustainability that a particular investment option deals with, they all focus on minimizing the environmental impact of activities and supporting environmentally oriented businesses while seeking greater financial prosperity. Green finance is associated with responsible investment, environmental, social, governance, sustainable, and climate finance. On the other hand, growing interest led the field to grow and evolve to offer more potential paths for businesses to make their green investment plans. Some of the green investment options and instruments include: 

• Green Bonds, Loans: These are the fixed-income securities that are issued by government, corporations, or financial institutions to fund environmentally friendly projects. This project includes but is not limited to sectors such as renewable energy or sustainable transportation. For example, the loan a recycling business receives to support its growth is considered a green bond.

• Green Mutual Funds: Green mutual funds allow multiple investors to invest in a broad portfolio of green assets, including renewable energy companies and sustainable infrastructure projects. This way, the money investors put together creates a pool for a specific environmental and sustainable project. 

• Green Private Equity and Venture Capital: This refers to organizations providing capital to environmentally friendly start-up projects or established businesses investing in environmentally sustainable projects or technologies in their sectors to make the business practices greener. 

• Impact Investing: Impact investing is a practice of allocating capital in business and projects to generate social and environmental impact alongside financial returns. With this approach, businesses can address pressing social and environmental issues to create positive change while achieving economic prosperity. 

• Carbon Credits: In simple terms, carbon credits are purchased by organizations to offset their carbon footprint. This can be their carbon footprint for a particular project or one or all of their business functions. 

What should you look for in evaluating a green investment opportunity?

Green investments come with a certain level of risk, which is generally no different than any other investment. However, considering green investment is closely tied to environmental factors, it carries its own risks including greenwashing. Therefore, it is essential to be careful while evaluating green investment options to protect the reputation of your business and brand. Below, see the three main factors that can directly affect the credibility of green investment opportunities and must be assessed at the evaluation stage.

1. Company Financial Health: Understanding a company's financial health is only possible by examining its balance sheet, income statement, and cash flow statement. Whether this be an investment for an established business or for a start-up, the company you are considering investing in must be transparent with all their financial records. Strong financial performance is one of the best indicators of potential investment gain in the long-term.

2. ESG Ratings and Reporting: ESG rating provides a snapshot of a company's exposure to environmental, social, and governance risks and how effectively it manages them. Companies receive their ESG ratings from third-party ESG rating providers, and these ratings and reports allow investors to assess a company's environmental, social, and governance practices and compare them with industry peers. There are many different providers of ESG ratings that companies can work with. Remember, it is always better to make sure that the ESG ratings and reportings are completed by reputable, trustworthy third parties. 

3. Green Certifications and Standards: Green certifications and standards serve as valuable tools for investors to verify the credibility of their investments. These certifications and standards usually cover a particular sector or type of business, such as  LEED, which is used for buildings, and B Corp, which is for businesses and helps investors identify companies and projects that meet specific environmental and social criteria.

Before diving into the world of green finance and investment, companies must think not only about the environmental factors but also the project's sustainable impact and the business's creditworthiness. At the evaluation stage, you might need expert help, however, regardless of the time it would take, evaluating your green investment options critically and considering the overall impact of such investments would help you make better choices and save your business from any inherent risks. If you want to learn more about these risks and understand concepts such as ESG, plenty of resources are waiting for you at Intengine's website. You can also find a suitable partner to advise you during your green investments journey on Intengine's directory.

Tags: investment, green investment, finance, green finance, sustainable finance