Broad-basing 'green' stock market indices: a concept note

Sustainability ('green') stock market indices are intended to focus attention on environmental credentials, to reward superior performance and to help channel investments. Such indices often incorporate clean energy, waste, water and waste water treatment, recycling and other 'pure play enviro' companies. This paper contends that in keeping with the philosophy of Green Economics, which advocates an expansive view of humankind's interaction with the environment, true environmental performance ('greenness') is indexed by the eco-sensitivity of mainstream businesses, by the level of stakeholder involvement and by the extent of information readily made available to society. Effective enforcement of environmental regulation requires contributions from all stakeholders concerned. With voluntary participation from businesses not readily forthcoming, and given the price-sensitivity of consumers, investors, through the incentive structures they face, could contribute to better enforcement of regulatory standards. Broad-basing the green index could be interpreted as recognising and rewarding the superior environmental performance of mainstream businesses and/or ensuring adequate representation in emerging markets, where a large number of 'pure play enviro' related instruments are unlikely to be listed.