The World Investor Week, which commenced on Oct 10, is a global campaign for raising awareness about the importance of investor education and protection. It is an initiative of the International Organization of Securities Commission, which is an international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector.
This year, one of the areas of focus at World Investor Week is sustainable finance. The term sustainable finance has become a common occurrence in investment parlance. Sustainable investing has been receiving attention from the investor community globally and in India too. The chatter around Environmental Social and Governance (ESG) investing has only grown louder. As per the World Economic Forum, “Sustainable investing covers a range of activities, from putting cash into green energy projects to investing in companies that demonstrate social values such as social inclusion or good governance by having, for example, more women on their boards.”
Sustainable finance entails investment decisions that factor in the environmental, social, and governance (ESG) factors of a business. The environmental lens is used to gauge a company’s commitment to environmental-friendly practices and minimizing the harmful impacts its business has on nature and the larger ecosystem. The social criteria are used to gauge the value systems that a company abides by when dealing with various stakeholders in its business ecosystem such as investors, vendors, contractors, employees customers, etc. Human rights, consumer protection, and hiring practices fall within the ambit of social considerations. Governance factors pertain to whether a company has good corporate governance practices and whether its internal management framework and ethics apparatuses are resilient enough to avert malpractices.
In an age where the calls for fair and sustainable business practices are getting louder and the implications of climate change are being felt by an overwhelming majority of countries across the globe, sustainable finance is emerging as a clarion call. At the 26th UN Climate Change Conference held in Glasgow in November 2021, the message was clear – all countries need to act now to mitigate the impacts of the impending climate emergency. A recent report by the United Nations’ Intergovernmental Panel on Climate Change highlights the need for ESG investing for accelerating the actions being taken to stall climate change impacts.
How to take the sustainable finance route?
The financial sector can wield enormous power in terms of funding and ushering in awareness about issues of sustainability and also pushing large corporations to implement responsible practices. If you are looking to take up the sustainable finance route here are a few things to keep in mind:
- Currently, the word compliance in the ESG context is a misnomer because currently, there is no established framework or set of rules through which companies can be categorised as ESG or non-ESG and ESG initiatives are largely undertaken proactively. In Oct 2021, the Securities and Exchange Board of India (SEBI) issued a consultation paper in which it had proposed stringent disclosure norms for ESG mutual fund schemes but these are yet to be mandated. Additionally, in May 2021, SEBI had issued a circular notifying new disclosure norms on sustainability related reporting for the top 1,000 listed companies by market cap by FY23.
- Fund houses deploy their own internal policies and criteria to analyse the performance of stocks against ESG metrics. Scoring mechanisms used by fund houses when screening companies and securities to align with ESG criteria may also vary.
- Due to the lack of standardized guidelines and disclosure norms for ESG funds and the absence of uniformity in evaluation criteria, the onus falls on the investors to gauge whether the funds and securities they may have chosen truly conform to ESG ideals. It is thus imperative for them to compare schemes, analyse the information documents minutely to ensure that the performance of the underlying companies can stand the ESG test and whether the scheme matches with the ESG expectations of the investors.
In order to invest via ESG model investors need to have clear objectives in mind with detailed reasoning. Once their objectives are clear it is easy to stick to them in the long term or else short-term temptations will always take over. One way to start embracing the ESG way is to avoid investments in certain sectors or specific issuers, based on values or risk-based criteria or by thematic ESG investments by allocating funds with specific themes or from specific sectors only.
ESG investing can help serve two purposes: it can help in risk mitigation, and it can help investors tap into new opportunities.. Also, the chances of occurrences of glaring unethical or illegal practices at such companies would be lower because of checks kept in place thanks to robust social and governance value systems. Thus regulatory risks can be mitigated and this helps sustain investor confidence in the long run.
Action points
- It is important to keep in mind that companies engaged in the businesses of tobacco, alcohol, controversial weapons, and gambling operations are not considered ESG-compliant.
- Make sure you know the source of the data going into the ratings of ESG funds and the methodologies adopted.
Disclaimer: This article is a part of an Investor education and awareness initiative of Aditya Birla Sun Life Mutual Fund.
All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link : https://mutualfund.adityabirlacapital.com/Investor-Education/education/kyc-and-redressal for further details.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
