Let’s get hot on sustainability

Few years back I asked myself a question, what is the possibility of a world with strong governance, enough empathy to help the growth of society as a whole and above all a world free of pollution (exaggeration, is it?). The Pandemic, wildfires, global warming have raised concerns around the same.

50 years back an organization’s value was based on its tangible asset like building, machinery, etc., but today it is its intellectual property and reputation. To increase their value many companies around the world are adopting sustainable ways of doing business.

Business sectors are deeply interconnected across borders, that societies of all types and wealth levels are vulnerable, and that the environment is under increasing strain — recently enough, the pandemic has reinforced the same. The IMF Global Financial Stability Report of April 2020 mentioned “Disasters as a result of climate change are projected to be more frequent and more severe, which could threaten financial stability.”

What has this led to?

This has led to a steady rise in sustainable funds which evaluate companies from environmental, social and governance lens (ESG). Investing by keeping these three important components in mind is termed as responsible/ impact/green/value investing and in totality the concept is called as sustainable finance or Socially Responsible Investing (SRI).

ESG is a generic term used in the capital market by investors to evaluate any company’s behavior before deciding to invest in them. Especially in the age of millennials, a sense of value investing has developed across, as they are not just looking to gain financial returns but also add value through their investments.

Let me point to you various ways of investment keeping in congruent with ESG features -

1. Invest in companies whose core products are environment friendly or support renewable sources of energy — like solar/wind energy, produces from biodegradable waste. Negate investing in companies that are perceived to have negative social impact like alcohol, tobacco, pornography, gambling, fossil fuel.

2. Invest in government-controlled funds — such as pension funds as they are often encouraged to adopt investment policies which encourage ethical corporate behavior

3. Invest in Mutual funds and ETFS — these funds allocate funds only to organizations who comply with ESG criteria in their operating style. These funds have proved to exhibit higher return than the funds that only look at financial gain. In India ESG fund is offered by SBI, Axis and Quantum.

4. Community investing — Finance NGOs and other community service organizations who can further help provide capital access to individuals who were earlier denied access to capital.

5. Invest in capital markets — Follow negative screening, exclude investing in securities that has negative impact on the community, environment. There are various SRI Indexes (tracks and allocates securities to companies that fulfill ESG criteria) that you could go long on and screen out negative impact organizations. One of the most followed indices globally is the MSCI ESG Index, take a look at the performance of funds in the below table.

In conclusion, ESG is a long-term trend yet to pick up in our country but the awareness is increasing by the day. With a greater focus on sustainability and India signing the Paris agreement, we have taken our first step towards sustainability. It will be an important criterion for all investing firms and individuals as this approach seeks to infuse a greater degree of responsibility while capitalizing investments.

Source of table: greencleanguide.com