esg: ESG investing: why investors need to add a touch of sustainability to their portfolios

Imagine a world where you could invest your money in a portfolio that not only generates good returns, but also has a long-term positive impact on society and the environment. Investments that do good for society without sacrificing returns. Isn’t that a win-win?

This is where sustainable investing comes in. Sustainable investing is an investment strategy that considers environmental, social and governance (ESG) factors. It looks beyond the quarterly numbers and considers the bigger picture.

The ESG criteria framework consists of three parts:

Agencies

Until a few years ago, portfolio managers would have avoided this idea, arguing that it was an innovative approach. However, sustainability is becoming an important factor in today’s investment landscape. Investors around the world have recognized that the key to effective investing is to integrate ESG factors into the investment process as they drive value.

Why choose sustainable investing?

In any industry, environmental, social and governance issues pose serious risks to operations and profits. Investing in profitable companies with unsafe work practices or a history of oil spills (contempt for the planet) may seem lucrative now, but it won’t pay off in the end.

With growing awareness of climate change and concerns about social injustice in the workplace, people are asking companies to be more transparent in their practices. Forward-thinking organizations know that ESG impacts their overall risk profile. Thus, the ESG approach to investing inherently reduces the risk of your portfolio.

Many smart investors have noted that integrating ESG into their investment process is not only the right thing to do, but is also a smart financial decision. Come to think of it, companies that actively work to address ESG risks are likely to be better investments because they will experience less business disruption, be more reliable, and produce more reliable financial results over time. This means less downside risk for shareholders.

Considering ESG factors in your investments could help you:

  • mitigate your investment risk
  • increase the resilience of your investments
  • provide long-term capital growth

Sustainable investing is not only investing with awareness, it 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 – a world driven by corporate greed that disregards the planet and its people, or a world driven through sustainable growth, where companies work for profitability but give the same importance to ESG factors.

How to make ESG investments?

Whether you want to take a DIY approach or go the mutual fund route, making ESG investments just got easier. For individual investors who lack the time and expertise to invest directly in stocks, investing in ESG mutual funds available in India and internationally is a good idea.

In India, ESG-themed mutual funds are funds that invest 80% or more of their assets under management in equities or equity-related instruments that have passed rigorous tests of corporate sustainability in terms of regarding its ESG criteria. There are currently nine ESG funds in India, including one ESG exchange-traded fund (ETF).

Want to take a hands-on approach to investing and invest on your own? You are in luck as more and more Indian companies these days are publishing ESG information in their reports showing how they are contributing to the betterment of society and doing their part for the planet.

Last year, the rating agency

launched an ESG score for Indian companies based on knowledge available in the public domain. Scores range from 1 to 100, with 100 being the best ESG performance. A higher ESG score not only makes a company a good potential investment, but also shows that the company is working for the betterment of society. In addition, 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 the following financial year in accordance with the accountability and transparency reporting standards. Corporate Sustainability (BRSR) from SEBI. These tools will help you identify stocks that score high on ESG factors, then you can submit them to your search filters to select the winners.

To sum up

By investing in companies with high ESG ratings and keeping your money away from those that perform poorly, you inspire senior executives to do even better. When you invest in a company that successfully uses clean energy or provides a great work environment and gives back, you are not only choosing a good long-term investment, but you are also investing in your values. Additionally, positive ESG metrics are associated with better overall company performance, making them good investments. An investment that pays well and does good.

(Shruti Jain is Chief Strategy Officer at Arihant Capital Markets)

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

Robert D. Coleman