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Ethical investing, also known as socially responsible investing (SRI), is a strategy to invest that is aligned with one’s moral principles, where investors prioritize companies or funds committed to sustainability and governance for a positive impact on society and the environment. This kind of investing involves intensive research into financial and non-financial factors of companies or funds to ensure alignment with one’s principles.

At the core of ethical investing are Environmental, Social, and Governance (ESG) parameters. Environmental factors assess a company’s impact on the planet, including its carbon footprint and resource management. Social factors evaluate the impact on the community, while governance assesses leadership quality and adherence to ethical business practices.

Typically, ethical investors avoid ‘sin stocks,’ such as companies that produce alcohol, tobacco, or firearms. Industries with significant carbon footprints or labour malpractice records may also be incompatible with these investing norms.

Why Ethical Investing Matters

• Climate Change and Economic Impact

The Deloitte Center for Sustainable Progress estimates climate change could cost the global economy a staggering USD 178 Trillion over the next 50 years. Instances like the untimely flooding of plains in Pakistan leading to a severe rice shortage, the increasing frequency of cyclonic storms on Indian shores, and the threat of rising sea levels to coastal cities are just a few examples illustrating the economic cost of climate change.

• Responsibility towards Community

In addition to producing goods and services, companies have a significant responsibility towards the community as well. This entails sound labour practices, practicing sustainability, and meeting Corporate Social Responsibility obligations.

• Ethical Practices

An organization that prioritizes ethical decision-making and upholds high standards of integrity, transparency, and legal compliance. Such an organization would create a culture of trust and accountability and would align with moral principles and legal regulations. Such an organization that consistently practices ethical decision-making contributes to a sustainable and responsible business environment.

How Can One Invest Ethically

Ethical investing can be achieved through thematic investing in sectors like renewable energy, clean technology, healthcare, and education. A great way to invest would be through ESG-themed Mutual Funds. Like any Mutual Fund, these funds would conduct detailed research on the ESG compliance of companies that they would invest in. However, before one chooses the fund to invest in, it is recommended to go through the process of goal planning. After all, the purpose of investing should primarily revolve around goal achievement.

Remember, ethical investing is not a trade-off between principles and performance. It’s about striking a balance to achieve your financial goals while contributing positively to a sustainable future.

Does investing in ESG Funds make good investing?

ESG norms are yet to gain widespread popularity in India, due to lack of accurate data, absence of standardized norms, and the perception of viewing ESG as a cost by many companies. Because of this, it is difficult to ascertain the effectiveness of ESG or Ethical Investing.

Over the past three years, numerous ESG funds have been launched, however limited number of picks within the ESG universe has hindered their ability to keep pace with the market’s upward trajectory. The ESG rating and classification norms also remain unclear with varied interpretations by rating agencies like S&P DJI ESG Scoring, Morningstar’s Sustainalytics, and Crisil’s ESG index leading to uncertainty and inconsistency in assessing a company’s environmental, social, and governance (ESG) performance.

We do believe that a large part of investing ethically would be to invest in equity and this is where it becomes important to follow a defined process. Successful equity investing requires a long-term orientation linked to financial goals. Also, navigating through volatility in the markets would require a clear investor mindset, thereby overcoming the behavioural traps of greed and fear. Ultimately, the larger purpose of ethical investing should remain to be goal achievement.

Ethical investing is an evolving space in India and in times to come when there is greater awareness, this will become relevant and more effective. We do feel that the trend of ethical investing remains a ‘wait and watch’ space for investing. However, an investor who chooses to employ this route toward goal achievement should be prepared for changing norms and lack of transparency, at least in the short term. In the longer term, like investing in any equity asset, patience as a virtue would be rewarding.

(The author is Co-founder and COO, FinEdge. Views are personal.)