The European green investment market is on an upswing, thanks largely to increasing awareness and support for the environment, availability of green funds and favourable regulations. Huge investments are being made in green product and technology development in areas of alternate energy systems, environmental building technologies and so on. This has led to financial engineering in this space and the advent of green financial products such as carbon credits, green/sustainable mortgage-backed securities, green hedge funds and social responsibility investment funds.

The Green Investment market increased by about 20 percent, from €150 billion in 2006 to €180.40 billion in 2007. It is further estimated that by 2014, the market will grow at a compound annual growth rate (CAGR) of 18 percent to reach €572.9 billion by 2014. Equity funds are expected to constitute the highest growing segment, with a CAGR of 18.6 percent, followed by balanced funds with a growth of 16.8 percent from 2007 to 2014.

“Global warming and world climate change are fuelling the growth of the green investments market, which has tremendous profit potential and is expected to mature in the years to come,” note Frost & Sullivan Financial Analysts Kirti Timmanagoudar and Kavitha Chakravarthy. “Regulatory support and public demand for green investments has led to the creation of an array of green investment alternatives such as green mutual funds, green hedge funds and green exchange traded funds.“

Governments are offering subsidies and tax relief and encouraging companies to go green. The carbon credit system is the most notable of them. In the future, one can expect governments laying down strict environmental standards, which need to be met by all companies. Additionally, pension funds are directing their money towards investments that are socially responsible.

“A regulation is expected soon wherein pension funds have to invest at least a proportion of their assets in social responsibility investments,” says Chakravarthy. “This is expected to further propel the growth of the green investments market.”

However, there is a lot of hype around green investing and no one wants to miss out on the green wave. This is leading to a risk of hot money flowing into the green investments market and overheating it.

“Too much of money flowing into the green investment market can artificially inflate the prices of the green stocks,” opines Timmanagoudar. “This could result in a green bubble burst, which can further lead to huge market losses and capital erosion.”

Overall, the European green investments market will yield above average returns in the medium term. The social responsibility investment funds have been yielding windfall gains and are expected to grow at above the market rate in the near future. Green investors should invest systematically and avoid putting all their money in the market at once. Their investment decision should be backed by strong research and they should be careful not to be carried away by the green tag used by the marketers.