The Rise of Sustainable Investing: A Guide to Investing in Sustainable Funds- Earth Day 2024 Special

In recent years, there has been an inclination towards investment in sustainability. Investors are increasingly looking beyond financial returns and considering the environmental, social, and governance (ESG) factors of their investments.

This growing trend of sustainable investing is not only driven by ethical considerations but also by the recognition that companies with strong ESG practices tend to outperform their peers in the long run.

In this blog post, we’ll dive into the world of sustainable funds, exploring –

• Financial performance
• Selection criteria
• Practical advice for Investors
• Alignment of portfolio with the core values

Understanding Sustainable Funds

Sustainable funds, also known as socially responsible funds or ESG funds, are investment vehicles that integrate environmental, social, and governance factors into their investment decisions.

These funds typically invest in companies that demonstrate a commitment to sustainability and ethical practices, while also delivering competitive financial returns.

Financial Performance of Sustainable Funds

One of the common misconceptions about sustainable investing is that it requires sacrificing returns for the sake of values.

However, many studies have proved that sustainable funds can perform just as well as, if not better than, traditional funds. For example, a study by Morgan Stanley found that sustainable equity funds delivered similar or better returns than traditional funds over a five-year period.

 Morgan Stanley Institute for Sustainable Investing study states that-

1. Sustainable Funds Perform Well: During the first half of 2023, sustainable funds achieved a median return of 6.9%. This means that investors who put their money into sustainable funds saw positive growth in their investments.

2. Traditional Funds Lagged Behind: In contrast, traditional funds recorded a 3.8% median return during the same period. This shows that sustainable funds outperformed their traditional counterparts.

3. Resilience of Sustainable Funds: What’s interesting is that this performance reversal happened after a year of underperformance in 2022. It highlights the resilience of sustainable funds even during challenging times.

Additionally, sustainable funds have shown resilience during market downturns, providing downside protection for investors.

Criteria for Selecting Investments

When selecting investments for sustainable funds, fund managers typically consider a range of ESG factors, including:

1. Environmental Factors: This may include a company’s carbon footprint, energy efficiency, water usage, and waste management practices.
2. Social Factors: This encompasses issues such as labor practices, human rights, diversity, and community relations.
3. Governance Factors: This involves assessing the quality of corporate governance, executive compensation, shareholder rights, and board diversity.

By evaluating these factors, fund managers aim to identify companies that are not only financially sound but also socially and environmentally responsible.

History of ESG funds in India

ESG (Environmental, Social, and Governance) investing in India has gained popularity, driven by increasing awareness of sustainability issues among investors, regulatory developments, and growing demand for responsible investment options.

Here’s a brief history of ESG funds in India:

1. Early 2000s: The concept of socially responsible investing (SRI) began to emerge in India, primarily focused on excluding certain sectors or companies based on ethical considerations.
2. 2010s: ESG investing started to gain momentum globally, and Indian investors and asset managers began to pay more attention to sustainability factors in investment decisions.
3. 2014:The Securities and Exchange Board of India (SEBI) issued guidelines for responsible investment, requiring mutual funds to disclose their voting policies and engagements with investee companies on ESG issues.
4. 2018:SEBI issued a circular mandating the integration of ESG factors into investment processes for mutual funds. This marked a significant step towards mainstreaming ESG investing in India.
5. 2019:Several asset management companies in India launched ESG-themed mutual funds and investment products to meet the growing demand for sustainable investment options. These funds typically consider ESG criteria in stock selection and portfolio construction.
6. 2020s: ESG investing continued to gather pace in India, with more asset managers offering ESG-focused products and investors showing increasing interest in sustainable finance.
7. Regulatory Developments: SEBI has been actively promoting ESG investing and sustainable finance through various initiatives, including guidelines for disclosure and reporting on ESG factors by listed companies.
8. Investor Awareness: There has been a growing awareness among Indian investors about the importance of considering ESG factors in investment decisions, driven by concerns about climate change, social inequality, corporate governance issues, and ethical business practices.

Overall, ESG investing in India has evolved from niche to mainstream, with increasing recognition of the importance of sustainable and responsible investing practices among investors, asset managers, and regulators.

Successful Sustainable Investment Strategies

There are various approaches to sustainable investing, including:

1. Exclusionary Screening: This involves excluding companies involved in controversial industries such as tobacco, weapons, or fossil fuels from the investment universe.
2. ESG Integration: This approach involves integrating ESG factors into traditional financial analysis to identify companies with strong sustainability credentials.
3. Impact Investing: This involves investing in companies or projects that have a positive social or environmental impact, alongside financial returns.

Practical Advice for Investors

For investors looking to incorporate sustainable funds into their portfolios, here are some practical tips:

1. Define Your Values: Clarify your sustainability goals and priorities to guide your investment decisions.
2. Research Fund Options: Explore different sustainable funds to find ones that align with your values and investment objectives.
3. Assess Performance: Look beyond past returns and consider the fund’s ESG criteria, investment approach, and track record of engagement with companies.
4. Diversify Your Portfolio: Consider integrating sustainable funds alongside traditional investments to achieve diversification and manage risk effectively.

Conclusion

Investing in sustainable funds offers investors an opportunity to align their portfolios with their values while also potentially generating competitive financial returns.

With the growing importance of sustainability in investment decision-making, sustainable funds are confirmed to play an increasingly significant role in the investment landscape.

By understanding the financial performance, selection criteria, and successful investment strategies of sustainable funds, investors can make informed decisions that benefit both their portfolios and the planet.