That’s where sustainable investing comes in. Sustainable investing is an investment strategy that considers environmental, social, and governance (ESG) factors. It looks beyond quarterly numbers and considers the bigger picture.
The ESG criteria framework consists of three parts:
Until a few years ago, portfolio managers would have shunned this idea, arguing it to be a novel approach. However, sustainability is becoming an important factor in today’s investing landscape. Investors worldwide have recognized that the key to investing effectively is to integrate ESG factors into the investment process as they are the drivers of value.
Why choose sustainable investment?
In any industry, environmental, social, and governance issues pose serious risks to operations and profits. Investing in profitable companies with unsafe workplace practices or a history of oil spills (disregard to the planet) may seem lucrative now, but it won’t pay off in the end.
With rising awareness about climate change and concerns about social injustice at workplaces, people are demanding businesses to be more transparent in their practices. Forward-thinking organizations know ESG impacts their overall risk profile. So, the ESG approach to investment inherently reduces your portfolio risk.
Many smart investors have noted that ESG integration into their investment process is not just the right thing to do but is also a smart financial move. Come to think of it, companies that actively work to address ESG risks are likely to be better investments as they will witness fewer business disruptions, will be more trusted and produce more reliable financial results over time. That means lower downside risk for shareholders.
Factoring ESG factors into your investments could help:
- mitigate your investment risk
- increase the resilience of your investments
- deliver long-term capital growth
Sustainable investing is not just investing with a conscience but is also a profitable investment strategy.
Investing is like voting. When you choose to invest in a company, you are essentially voting with your money for the kind of world you want – one that is driven by corporate greed that disregards the planet, and its people or one that is driven by sustainable growth, where companies work towards profits but place equal importance on ESG factors.
How to make ESG investments?
Whether you want to take a DIY approach or take the mutual fund route, making ESG investment has become easier. For individual investors who lack time and expertise to invest in stocks directly, investing in ESG mutual fund schemes available in India and internationally is a good idea.
In India, ESG-themed mutual fund schemes are funds that invest 80% or more of their assets under management in equity or equity-related instruments that have passed stringent tests over how sustainable the company is regarding its ESG criteria. Currently there are nine ESG funds in India including an ESG exchange traded fund (ETF).
Want to take a hands-on approach to investing and invest on your own? You’re in luck because more and more Indian companies are making ESG disclosures these days in their reports showcasing how they contribute to the betterment of society and are doing their bit for the planet.
Last year, rating agency
launched an ESG score for Indian firms based on the knowledge available in the public domain. The scores vary from 1-100 with 100 being the best ESG performance. A higher ESG score not only makes a company a good potential investment but also showcases that the firm is working for the betterment of society. Additionally, the Securities and Exchange Board of India (SEBI) has made it mandatory for the top 1,000 listed companies to disclose non-financial information from next fiscal year under SEBI’s Business Responsibility and Sustainability Reporting (BRSR) norms. These tools will help you identify stocks that score high on ESG factors and then you can put them through your research filters to pick winners.
To sum it up
By investing in companies with a high ESG rating and keeping your money out from those who score poorly, you are incentivizing the top executives to do even better. When you invest in a company that successfully uses clean energy or has a great working environment and gives back, you’re not just picking a good long-term investment but also investing in your values. Besides, positive ESG measures are associated with better overall business performance, thereby making them good investments. An investment that pays well and feels good.
(Shruti Jain is Chief Strategy Officer at Arihant Capital Markets)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)