Sustainability. That’s the biggest concern for every invention or innovation in today’s world that’s grappling with the threat of climate change. People around the world are looking for ways to invest their money that would generate handsome financial returns as well as help them respond to global challenges such as environmental pollution, pandemics like Covid-19, and inequality.
An environmentally conscious citizen today looks to invest in companies that share her values of sustainable development, instead of the conventional focus on profits alone.
Increasing awareness about the environment and worsening of ecological balance have led to a fundamental change across the world in the values that drive investments. The change has translated into the emergence of green investing. Green investments focus on firms or projects that are devoted to natural resource conservation.
Green bonds are one of the latest instruments that have attracted investor fancy. The green bond market allows investors to contribute to the transition of the traditional economy into a low-carbon resilient (LCR) economy that combines the requirement for rapid growth with environmental sustainability.
Incentives such as tax breaks and increased knowledge of green bonds influence an investor’s choice to invest in it. In India, the top three funds — SBI Magnum Equity ESG, Quantum India ESG Equity, and Axis ESG — are now adopting the green investment approach. The Nifty 100 ESG Index was created to measure the performance of firms in the Nifty 100 index based on their environmental, social, and governance (ESG) scores. Across multiple timeframes, the Nifty 100 ESG Index has beaten its parent index, the Nifty 100.
The Indian mutual fund sector, which is usually quick to capitalise on such topics, has also launched a host of ESG-focused products. Retail investors can choose from funds such as Aditya Birla Sun Life ESG Fund, ICICI Prudential ESG Fund and Kotak ESG Opportunities Fund.
Each of these has its own approach to investing. While the Kotak ESG Opportunities Fund focuses on a company’s ESG principles as evidenced by its disclosures and ESG score calculated using its proprietary business, management, and valuation (BMV) approach, Mirae Asset ESG Sector Leaders ETF is managed passively by mimicking the stock weights in the Nifty 100 ESG Sector Leaders Index. Quantum India ESG Equity Fund employs its own approach for analysing firms based on ground research to focus on a long-term strategy.
Investments in equities and mutual funds are still considered a gambling by many people in this country. As the situation is changing fast, there is a high probability that sustainable green investments would be treated differently from traditional investing, attracting more investors willing to make a constructive contribution to society while earning a positive return.
As ESG becomes more widely enforced by investors, firms with high ESG ratings will become preferred holdings. This self-fulfilling process will make ESG ratings work better in forecasting a company’s share price movements, at least in the short term, while investors adjust their portfolios to the new reality and companies respond by changing their workplace practises and evolving their products over time.
A Sebi directive under the Business Responsibility and Sustainability Reporting (BRSR) makes voluntary disclosures mandatory from the financial year 2020-21 onwards, but experts warn against it becoming another box-ticking activity by companies.
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- According to a recent survey by EPFR, SRI and ESG investments received $168.74 billion in inflows in 2020, up from $63.34 billion in 2019
- According to study done by Arabesque Partners in 2020, 80% of the papers evaluated concluded that sustainability policies had a favourable impact on investment performance
- The Nifty100 ESG Index beat the Nifty50 in 2020, generating better 5-year returns
- According to Morningstar, roughly $2.96 trillion dollars has been invested globally in funds that are managed with an ESG focus