esg: ESG Investing: Why investors need to add a flavour of sustainability in their portfolios

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

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

The ESG criteria framework consists of three parts:

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

Why choose sustainable investments?

In any industry, environmental, social and governance issues pose serious risks to operations and profits. Investing in profitable companies with unsafe workplace practices or a history of oil spills (disregard for the planet) may seem lucrative now, but it will turn out to be… not pay off at the end.

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

Many savvy investors have found that integrating ESG into their investment process is not only the right thing to do, but also a smart financial move. Think about it, companies that are actively working to address ESG risks are likely to be better investments because they experience less business disruption, enjoy greater trust, and deliver more reliable financial results over time. That means less downside risk for shareholders.

Incorporating ESG factors into your investments could help:

  • minimize your investment risk
  • increase the resilience of your investments
  • deliver long-term capital growth

Sustainable investing is not only conscientious investing, but also a profitable investment strategy.

Investing is like voting. When you decide to invest in a company, you are essentially voting with your money for the kind of world you want — one fueled by corporate greed that disregards the planet and its people, or one , which is driven by sustainable growth, in which companies work towards profits but give equal importance to ESG factors.

How are ESG investments made?

Whether you want to take a do-it-yourself approach or take the mutual fund route, it just got easier to invest in ESG. For individual investors who lack the time and expertise to invest directly in equities, investing in ESG mutual funds that are 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 how sustainable the company is in relation to its ESG criteria. There are currently nine ESG funds in India, including one ESG Exchange Traded Fund (ETF).

Would you like to take a hands-on approach to investing and invest yourself? You are in luck as more and more Indian companies are now making ESG disclosures in their reports, showing how they are helping to improve society and do their bit for the planet.

Rating agency last year

has introduced an ESG score for Indian companies based on publicly available knowledge. Scores vary 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 under SEBI’s Corporate Responsibility and Sustainability Reporting (BRSR) standards starting next fiscal year. These tools help you identify stocks that are performing well on ESG factors, and you can then run them through your research filters to pick winners.

summarize something

By investing in companies with high ESG ratings and keeping your money away from those that are underperforming, you give top executives an incentive to do even better. When you invest in a company that is successful in using clean energy or has a great work environment and gives back, you are not only making a good long-term investment, you are also investing in your values. Also, positive ESG measures are associated with better overall company performance, making them good investments. An investment that pays off and feels good.

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

(Disclaimer: Experts’ recommendations, suggestions, views and opinions are their own. These do not represent the views of Economic Times) esg: ESG Investing: Why investors need to add a flavour of sustainability in their portfolios

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