This post initially appeared in Moneycontrol.com
Do you feel strongly about climate change or wish to contribute to society but don’t know how to go about it? One way to achieve it is through investing in companies/mutual funds which are aligned with your values.
For instance, in the US, investors who feel that they can contribute towards a cleaner environment are backing the California-based automotive firm Tesla which produces zero-emission electric cars.
In investment parlance, this method of investing is known as socially responsible investing which is fast gaining popularity. Morningstar defines sustainable investing as a long-term approach that incorporates environmental, social, and governance, or ESG, factors into the investment process.
Responsible investment does not require ruling out investment in any sector or company. It simply involves including ESG information in investment decision-making keeping.
The acceptance for responsible investing is gaining ground. According to the 2014 Nielsen Global Survey of Corporate Social Responsibility, more than half of consumers surveyed globally said they would be willing to pay more for products and services from companies committed to positive social and environmental impact.
Two-thirds said they would prefer to work for a socially responsible company. When it comes to investing, a recent Morgan Stanley survey found 71% of respondents indicated they were interested in sustainable investing.
Investors increasing focus on ESG is evident by the growth in ESG assets globally. According to a McKinsey report, ESG assets totaled USD 22 trillion across Asia, Australia, New Zealand, Canada, Europe and the US at the start of 2016. There are 187 US-listed open-end funds and ETFs in this space, with total assets of USD 75 billion.
Internationally, institutional investors who practice ESG investing include Government Pension Investment Fund (GPIF) of Japan, Norway’s Government Pension Fund Global (GPFG), and the Dutch pension fund ABP.
In the UK, defined schemes are expected to grow six-fold to £1.7trn by 2030 and the UK government is considering issuing guidelines on adopting socially responsible investing.
Many asset managers and retirement funds across the globe have committed to socially responsible investing by being signatories to the United Nations supported network of investors called Principles for Responsible Investment, or PRI.
The PRI works with its international network of signatories to put the six Principles for Responsible Investment into practice. Its goals are to understand the investment implications of environmental, social and governance issues and to support signatories in integrating these issues into investment and ownership decisions.
Back in India, ESG is still a niche market. That said, the government and SEBI has recognized the importance of adopting responsible business practices in the interest of the social set-up.
In fact, the Ministry of Corporate Affairs came out with the 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business' in 2011.
From 2012, the top 100 listed companies according to market capitalization are disclosing Business Responsibility Reports in their annual reports.
The size of the ESG linked investments in India is pegged to be $30 billion and estimated to touch $240 billion in next 10 years, as per cKinetics.
So how do you go about making socially responsible investing? There are two ways to investing in companies which score high on ESG – buying the stock directly or through mutual funds.
In India, there are a handful of socially responsible funds such as Tata Ethical Fund, Taurus and Reliance ETF Shariah BeES which follow the moral codes of Shariah law while investing.
For instance, the Shariah law does not permit investing in companies dealing in alcohol, weapons, gambling and so on. While these funds are around for a long time, they are yet to catch investors fancy.
Morningstar has been helping investors make an informed decision while looking to invest in such funds through its The Morningstar Sustainability RatingTM in developed markets.
It is a measure of how well the holdings in a portfolio are managing their environmental, social, and governance, or ESG, risks, and opportunities relative to their Morningstar Category peers.
In 2016, Morningstar launched its Morningstar India Sustainability Index which ranks companies as per their ESG score. Technology companies like Wipro, Infosys and Tech Mahindra had the highest ESG score in the Morningstar India Sustainability Index.
This can be a good starting point for Indian bourses filter their socially responsible investing choices. Bombay Stock Exchange and National Stock Exchange also have ESG indices which can help investors screen such companies.
Going ahead, the ESG market is expected to grow rapidly as investors across the globe grow conscious of issues such as environment, workplace policies, product safety, and the global supply chain.
