Last Saturday was World Environment Day. In keeping with that spirit, we thought we’d touch upon a topic that is both pertinent and unfamiliar.
In recent times, there has been a rising awareness of climate change, coupled with a host of other environmental concerns. All of us are trying to bring about a difference in our own ways, be it by giving up on single-use plastic, or by using public transport, or by composting our waste. Along with the environment, there is also an increasing consciousness about how we impact society. Now, what if we told you that you could make a difference even on the investing front? Is it possible to invest more sustainably?
The idea of investing based on a set of principles and not merely for profits is as old as the idea of investing itself.
For instance, a lot of people who are vegetarian/vegan avoid investing in companies that produce meat and dairy products. Our values and beliefs play a role in the way we invest. And if positive societal impact is something that we all strive for, then our investment choices will reflect the same.
Terms like responsible, sustainable, green, impact and ESG investing are often used interchangeably. So what really is ESG investing?
The What of ESG Investing
ESG investing is choosing to invest in businesses that score high on environmental, social, and governance standards. On the environmental front, this could mean considering a company’s carbon footprint. On the social front, it might mean evaluating a company’s policies on employee well-being. And on the governance front, it could mean understanding whether a company’s practices are in the interest of not only the promoters but also the shareholders.
The How of ESG Investing
In India, ESG investing is at a nascent stage. One could invest directly in companies that have a good ESG rating. It is also possible to invest in specific mutual funds that are ESG themed. Another option is investing in Green bonds.
Mutual funds: In the last two years itself, mutual fund houses have launched a total of eight ESG funds. Whereas globally, there are more than 3,000 such schemes available. Here’s a list of ESG mutual funds in India.
Shares: There are a couple of ways to identify listed companies with good ESG ratings. You can either check the Nifty100 ESG Index where the National Stock Exchange (NSE) has listed around 90 companies based on their ESG score weights. You can also check the rating agency Sustainalytics for scores of various listed companies. Yet another way to identify companies is by looking at the portfolios of various ESG Mutual Funds.
Bonds: There is a specific category of bonds called Green Bonds or Climate Bonds. As the name suggests, the funds raised through these bonds are utilized to support climate projects. In the past, Indian Renewable Energy Development Agency (IREDA), Indian Railway Finance Corporation (IRFC), SBI and many other organizations have issued green bonds. Most recently, Ghaziabad issued India’s first municipal green bond.
To sum up
An Oxford study suggests that most companies that are ESG oriented have a lower cost of capital, high operational performance and higher share price performance. This goes to show that ESG investing is not just a theme, but a foolproof investment strategy that ensures long-term sustainability. It would indeed make sense to have at least one ESG investment in your portfolio. The future looks bright for any organization that puts the betterment of the world before maximization of profits. We’d love to hear your thoughts on this too. Has green investing ever crossed your mind?
PS: This week’s book recommendation is an intriguing read – Range: How Generalists Triumph in a Specialized World by David Epstein. Take a look at this video as the author has an in-depth conversation about the idea behind the book.
