MUMBAI (Reuters) - BSE Ltd is in talks for an exchange-traded fund (ETF) tracking the bourse operator's climate change index to be launched within the next couple of years, to take advantage of rising global demand for green investment options.

BSE, formerly the Bombay Stock Exchange, will work with an asset manager to set up the fund investing in shares that make up the S&P Carbonex, launched in 2012.

"Investors who look to invest with a longer-term horizon tend to be a little more into nudging companies into sustainable activities," Chief Executive Ashishkumar Chauhan said at the Reuters Global Climate Change Summit.

"This is not only a do-good kind of activity, but also a commercially prudent framework for investors to look at."

Global asset managers had $13.6 trillion in environmental, social and governance investing strategies at the end of 2013, according to tracker Global Sustainable Investment Alliance. But only a fraction reached emerging markets such as India which are widely seen as less strict about environment protection.

That is likely to change with large, long-term investors such as pension funds focusing more closely on companies' environmental track-records and preparedness for climate change, to insulate themselves from risk events, analysts say.

A company's climate change strategy "does play a part in our investment decisions," said Asia Managing Director Hugh Young of Aberdeen Asset Management, which runs the world's largest India-focused fund at about $5.2 billion.

Aberdeen has a dedicated team that looks for companies' sustainable practices, Young said.

Dublin-based Kleinwort Benson Investors, which manages about $4.2 billion, invests about 15 percent of its funds in environment-related enterprises in emerging markets, said Chief Economist and Investment Strategist Eoin Fahy.

In India, those investments include Greenko Group LLC, an owner and operator of clean energy projects, and Jain Irrigation Systems Ltd, a manufacturer of irrigation systems and components.

GREEN DERIVATIVES

BSE's Chauhan, speaking at the summit held at the Reuters office in Mumbai, declined to name the asset managers the exchange is in talks with for the launch of the climate change ETF.

But he said marketing teams of S&P Dow Jones Indices LLC have reached out to investors who have put money into such products elsewhere, to research appetite.

BSE tied up with S&P Dow Jones Indices last year in an equal joint venture through which the global index service provider was able to operate and market BSE's indices globally, including the flagship Sensex.

When the ETF is listed - and traded like any other security on an exchange, such as shares - it would be the first climate change index fund of Indian companies globally.

"We continue to prod investors and people who specialise in (green) investments about tracking this index and having an ETF," Chauhan said.

BSE would further tap into demand by offering derivative products in the next few years based on the Carbonex, Chauhan said. That index is identical to the BSE 100 but puts more emphasis on the less-polluting companies.

"Few investors, large investors can invest in an ETF and it will still work. When you put derivatives on that then you are basically offering it to a very large number of people," Chauhan said.

LISTING BSE

BSE, whose stakeholders include Singapore Exchange Ltd, Deutsche Boerse AG and billionaire George Soros, last year sought regulatory approval to list itself, which will allow some investors to divest their stakes.

"We get queries (from stakeholders) and they want us to list as fast as possible," Chauhan said.

The company, which operates Asia's oldest stock exchange, had hired 14 banks in 2012 to manage an initial public offering (IPO). It is now preparing a draft IPO prospectus with an eye to selling shares within two to three months of receiving regulatory approval, Chauhan said.

"An exchange should not work in dark corners... By listing you bring much more transparency to the operations and that's what is required to be done."

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(Editing by Christopher Cushing)