Female hand watering young plant with stack coin for growing business Investment
Investors put their capital at risk to generate returns that can meet their goals. However, many investors are now choosing to make investments that also satisfy their personal moral code. They are increasingly investing in companies and assets that make a positive difference or do good or maybe just abstain from doing bad. Does this mean that to invest ethically one needs to compromise on returns? The short answer to that is NO!
So what exactly is ethical investing?
Ethical investing gratifies an individuals' moral needs and basically involves making socially responsible investment decisions. It can broadly be classified into:
ESG Investing: This involves investing in companies that satisfy values related to 'Environmental, Social and Governance' related causes. Investors looking to do ESG investing would invest in companies that adhere to certain standards related to environment protection, consumer protection, religious beliefs and human rights.
Shareholder advocacy: Investors can choose to exercise their rights as shareholders and proactively influence corporate decisions that are likely to have a meaningful impact on business practices and society.
Community investing: There is a considerable part of the population that is underserved by large financial institutions. Through community investing, capital is channelised to segments of the society that have the need for but do not have the access to, low-interest loans.
How can we invest ethically?
The first step is to examine the causes that you are most passionate about and then choose from the available investment options. Investors can apply positive, negative or restricted screens in order to filter these options further. A negative screen involves actively avoiding certain kind of companies.
This could be because of the sector that they operate in, example tobacco, or for any other moral reason. A positive screen on the other hand involves seeking out companies that promote or are actively involved in causes that you as an investor support. A restricted screen usually helps filter large, diversified corporations that are involved in multiple businesses, some of which might meet your ethical investing requirements and some might not. The last step before making the investment is to ensure that the investments align with your long-term financial plan.
Avenues available for ethical investing
Intuitively, the best way to invest ethically would be to filter out companies that meet your moral requirements and support the causes that are important to you. However, this can be time consuming and requires in-depth research. A great alternative is to invest in indices or funds that invest in such companies. Environmentally conscious investors can choose to invest in the S&P BSE Greenex or the S&P BSE Carbonex. While the former comprises companies that follow energy efficient practices the latter selects companies based on how well they deal with risks arising from climate change.
The S&P BSE Greenex has generated YTD returns of 12.88% and yielded 5.09% in the last 3 years. The S&P BSE Carbonex on the other hand has generated YTD returns of 22.92% and yielded 9.86% in the last 3 years.
Another form of ethical investing that is catching on is Shariah-compliant investing which filters companies based on Islamic law. While it precludes companies that both earn or pay interest, it also excludes companies involved in advertising and media, alcohol, tobacco, gambling, among others. The S&P BSE 500 Shariah has generated YTD returns of 15.63% and yielded 8.30% in the last three years.
Investors are becoming increasingly conscious about the type of companies that they invest in and numbers indicate that they can choose to follow ethical investing without having to compromise on returns.
(The writer is the Chief Executive
Officer of Edelweiss Asset Management Limited)