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Sustainable Investing in India: ESG Investments    

Sustainable Investing in India: ESG Investments    

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Sustainable Investing in India

Are you looking to make investments you are truly proud of- In this article, Ms Shruti Jain, Chief Strategy Officer at Arihant Capital explains how you can do Sustainable Investing or ESG Investing.

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Topics around sustainability and climate change have taken the world by storm.

At this point, you’ve probably started carrying your own reusable water bottle, ditched straws, started recycling and made carrying your own shopping bag to the supermarket a habit. If you care for the planet, your investment choices should follow the same sustainable and ethical yardstick. You wouldn’t want to invest your money in places that fundamentally oppose your values {to chase profits}.

In fact, even investors worldwide are scrambling to jump aboard the sustainable bandwagon. A growing number of investors are not just looking for better returns but want their money to fund companies that are committed to a better world. No wonder money has been pouring into ESG funds worldwide.


What is sustainable investing?

Earning a profit is the top priority for investors. However, with sustainable investing, profit isn’t the only goal. Creating an impact is equally, if not more, important.

Sustainable investing is a strategy that uses investment rupees to promote positive societal impact, environmental well-being, and corporate responsibility, along with long-term financial return.

The concept of sustainable investing has become very popular, especially due to the millennials and Gen-Z who prefer to support and invest in companies committed to driving positive change. Several strategies can be pursued when it comes to investing sustainably like impact investing, ethical investing, socially responsible investing (SRI), and environmental, social and governance (ESG) investing.


Socially Responsible Investing

Socially responsible investing (or ethical investing) handpicks investments based on specific ethical considerations like avoiding companies associated with tobacco, alcohol, human rights and labour violations. However, since everyone has different values, how investors define SRI will vary from person to person. If you’re a vegan or a Jain, your portfolio will eschew any company engaged in animal cruelty. In case you’re passionate about the environment, your portfolio will likely have investments in green energy sources or creating sustainable solutions such as wind, solar and waste management companies. If you care about supporting the advancement of women and other marginalized groups, you may have some mutual funds that invest in women-run companies, or you may choose Shuna company if you learn that it mistreats employees.


Impact Investing

Impact investing is an investing strategy that involves making investments with the aim of creating a measurable beneficial impact on the environment or society, in addition to strong investment returns. In the case of impact investing, while a positive outcome is of utmost importance, it’s important to note that impact investment is not an act of charity. Every investment made should generate tangible social returns along with sound financial returns. Let’s say you had a choice between investing in a big internal combustion engine (ICE) automobile company or an electric vehicle startup. If you took the standard investing approach, you’d only consider which choice offered the best financial return. An impact investor would also take into consideration the environmental impact of both businesses, together with their potential returns.


ESG Investing

One of the most popular sustainable investing strategies is ESG investing, under which investors refer to the environmental, social, and governance criteria for evaluating corporate behaviour and screening potential investments.


Understanding ESG investing

ESG investing takes a broader and more proactive approach by evaluating due diligence factors in companies. Using the ESG criterion the sustainability and ethics of a company are evaluated while also evaluating the company’s finances, management, and other aspects. If companies treat the environment, workers, suppliers and customers better, it will definitely be better for business in the long term.


The ESG Criteria framework consists of three parts:

Environmental Criteria

Environmental criteria, as the name suggests, focus on how the company manages its effects on the environment and the sustainability initiatives that it drives. It includes things like the company’s energy use, recycling policies, efficient use of natural resources, waste management, tracking carbon footprint, and climate change mitigation steps. It might also assess the company’s efforts to advance renewable energy and design products with the environment in mind.

Social Criteria

Social criteria include how the company treats and interacts with all its stakeholders (employees, customers, vendors), understanding if the company gives back to the communities it operates in, its data privacy policies, and in some cases, it’s animal welfare policies. Providing healthy working conditions, seeking gender equality among employees and on the board, offering training to staff, banning animal testing and the use of animal products, and showing a commitment to charitable endeavours are all strong examples of social initiatives a company may choose.

Governance Criteria

Governance criteria are about the management, company’s policies and compliance, the business ethics of the company and how stakeholder-friendly the company is. It includes everything from executive pay and diversity in leadership to anti-corruption policies, transparency in communication with shareholders and regular unbiased audits.

An oil and gas company could be considered a responsible investment if it is committed to reducing its carbon footprint, treating its employees fairly and giving back to its communities.


ESG Landscape in India

While ESG funds have gained a lot of traction in developed markets, like the US and Germany, they are just starting out in India. Access to reliable data can be challenging in developing markets but that may start to change as ESG funds become more common. Among the mutual fund companies in India, SBI Magnum Equity ESG Fund was the first ESG-compliant fund launched in 2018 (a diversified fund turned into an ESG one). It is also the largest ESG fund in India. As of June 2022, the nine ESG funds in India together manage ₹10,800 crores worth of investments, according to data provided by the Association of Mutual Funds of India (AMFI).


ESG Funds Available in India

Here is a list of the ESG funds available for investing in India, including an ESG ETF:

  • Aditya Birla Sun Life ESG Fund.
  • Axis ESG Equity Fund.
  • ICICI Prudential ESG Fund.
  • Invesco India ESG Equity Fund
  • Kotak ESG Opportunities Fund.
  • Quant ESG Equity Fund.
  • Quantum India ESG Equity Fund.
  • Mirae Asset ESG Sector Leaders ETF.
  • SBI Magnum Equity ESG Fund.

ESG Ratings in India

In India, currently, Crisil offers its environmental, social and governance (ESG) scores for 586 companies across 58 sectors. Sustainalytics by Morningstar, an international rating agency, also covers 100 Indian companies under its ESG rating. However, Indian companies have to catch up when it comes to their ESG disclosures. According to Crisil, only 1 in 5 Indian companies reported their Scope 1 and Scope 2 greenhouse gas (GHG) emissions. The disclosure on Scope 3 emissions was even worse — only 63 out of 586 companies published this data.

As sustainable investing becomes more appealing to conscious investors, major stock exchanges have begun introducing their own sustainability guidelines. The Bombay StockExchange of India (BSE) also has ESG-themed S&P BSE 100 ESG Index and NSE has three ESG-themed indices. Each of these indices includes companies that have an ESG score and excludes those engaged in the business of tobacco, alcohol, controversial weapons and gambling operations.

Infosys, Mahindra & Mahindra (M&M), Tech Mahindra, and HDFC are companies that topped the list of companies with the strongest ESG scores in India, according to a study conducted by corporate governance firm Stakeholders Empowerment Services (SES).


How to make ESG Investments?

When you are creating your own ESG portfolio, you can consider the following kinds of investments.

Individual Stocks

The best way to create an ESG portfolio is to handpick stocks that align with your values. Picking sustainable stocks for your portfolio is essentially no different than choosing any other, there is just an added layer of research involved that considers the environmental, social and governance factors into consideration. You can check the ESG ratings of companies by agencies like Crisil for identifying companies.

However, researching stocks and managing a portfolio may not be for everyone. Managed portfolio with ESG investments is an alternative option.

Mutual Funds

For individual investors who don’t have the expertise in investing in equities or lack the time of undertaking research and monitoring, mutual funds are a great way to invest in equities. They also diversify your holdings instantly. Currently, there are 9 ESG funds in India managing close to ₹10,800 crores.

Alternative Investments

For high-net-worth individuals looking to invest over ₹1 crore, alternate investment funds can be a better option. These are sophisticated products and offer more flexibility and better service considering its targeted at HNIs. In India, you can currently invest in Avendus India ESG Fund.

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. 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.

Besides, positive ESG measures are associated with better overall business performance, thereby making them good investments.

Also read: Understanding ESG Investing & Its Emergence


Courtesy: Bombay Stock Exchange Brokers’ Forum (BBF) FORUM VIEWS magazine, August 2022 edition (A monthly Capital Markets & Lifestyle magazine)

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