Modules for Investors
Alternate investment options in India outside of pureplay financial instruments
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Investing for the good: How ESG investing is picking up in India
When you think of the key objective behind investing in general, what comes to mind? If you’re like most people, you will likely zero in on wealth creation as the primary goal of investments, isn’t it? In most cases, that is true. However, in recent years, there’s another investment objective that is fast gaining traction. And that is the possibility of investing to create wealth, while simultaneously investing in a manner that is ethical and socially beneficial.
This kind of an investment strategy is known by many names. Some call it ethical investing, others call it sustainable investing, and yet others may refer to it as social investing. More popularly, however, it is known as ESG investing.
What is ESG investing?
ESG investing - an acronym for Environmental, Social and Governance - is a kind of investing that involves assessing how a company or a business impacts the environment and the society, and investing only in those businesses that are sustainable and have ethical practices.
Before investing in an asset or a company, investors typically analyze the following parameters.
This involves looking at how the practices and policies adopted by a business impact the environment. You need to look at areas like the impact on climate change, pollution, deforestation, energy efficiency and waste management practices.
In this category, you must evaluate how the business impacts people and the society in which it functions. Areas of interest here include employee engagement, customer relationships, human rights, labor practices and overall community relationships.
Governance refers to how the internal policies of the business are framed, and whether they are created and implemented ethically. Things like the composition of the board, any charges of bribery or corruption, audit results and more are relevant here.
Why ESG investing?
The business practices adopted by a company are often overlooked when investors analyze different parameters to evaluate the worth of investing in that company. However, this is a very relevant area to focus on, because when you buy the shares of a company, you are providing that company with some capital - no matter how little. So, it is essential to ensure that the companies you are funding are not engaging in practices that are detrimental to the society and the environment you are living in. In other words, you do not want to invest in a company whose policies and practices could have an adverse impact on you, isn’t it?
And in addition to this, when you take a look at the bigger picture, ESG investing has a positive impact on the planet. It encourages businesses to adopt sustainable practices and enforce ethical laws.
ESG investing in India
ESG investing has been picking up rapidly in India in recent years. However, this practice has been in focus for over a decade now. In fact, back in April 2011, the Nifty 100 ESG index was launched in order to bring in a reliable way for investors to invest in a socially responsible manner.
The outbreak of the COVID-19 pandemic furthered the popularity of as well as the need for ESG investing on a global scale. And India, like many other countries, has also been witnessing a surge in this segment. In addition to the Nifty 100 ESG Index, the Indian financial markets are also home to several ESG funds. Data reveals that over the past two years, the Assets Under Management (AUM) of the ESG funds in India have risen by around 4.7 times, from Rs. 2,630 crores in November 2019 to Rs. 12,300 in 2021.
This is indicative of how ESG investing has been gaining ground and momentum in India over time. Experts also predict that in the coming years, ESG investing could evolve more rapidly, since the segment has exceptional potential for growth.
How to get started with ESG investing in India?
If you are an Indian investor keen on adopting social and ethical investment practices, you can choose from any of the strategies outlined below.
Invest directly in the equity of ethical companies
If you are financially savvy and can afford to take on a higher level of risk in your investment portfolio, you can invest in the stocks that mirror the Nifty 100 ESG Index. This way, you can allocate a sizable portion of your portfolio to ESG equity stocks.
Invest in ESG funds
If you are not a seasoned investor yet, you could invest in ESG funds. Since these funds are professionally managed, you do not have to monitor your fund portfolio or make the investment decisions needed. It also gives you the opportunity to invest small amounts via SIPs.
Invest in sustainable businesses
If you prefer to be an angel investor or want to invest in small businesses, you can pick those enterprises that have sustainable objectives and actually seek to make a positive difference to the planet. Keep in mind that this strategy bears a higher degree of risk.
Is ESG investing right for you?
Before you consider ESG investing, you need to be clear if this kind of investing is for you. While it may not be a clear-cut decision, here are some scenarios or situations where ESG investing may be right for you.
- If you are a long-term investor
- If you are interested in sustainable investing
- If your portfolio can bear a higher degree of risk exposure
- If you are fairly well-versed about investing in the stock market
Things to keep in mind before you get started with ESG investing
If you are planning to go the ESG investing way, there are some key things to keep in mind before you give your portfolio a makeover. Here are the main considerations to be aware of.
- Sustainable investing is a rapidly evolving market segment. So, you need to keep an eye out on the latest developments.
- In addition to the ESG criteria, you also need to factor in the other fundamental or technical aspects of the stocks before you invest in them.
- You can diversify your portfolio across a wide range of ESG assets, without compromising on the ethical objective.
A quick recap
- ESG investing - an acronym for Environmental, Social and Governance - is a kind of investing that involves assessing how a company or a business impacts the environment and the society, and investing only in those businesses that are sustainable and have ethical practices.
- Before investing in an asset or a company, investors typically analyze environmental, social and governance parameters.
- In India, back in April 2011, the Nifty 100 ESG index was launched in order to bring in a reliable way for investors to invest in a socially responsible manner.
- In addition to the Nifty 100 ESG Index, the Indian financial markets are also home to several ESG funds.
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