By Kshitij Ojha
Over the years, the Western world has witnessed a significant transformation in the realm of investment. Investment decisions have been based on various criteria, some of which have become common across the globe. One of the most recent and noteworthy trends is ethical investing, also known as sustainable or ESG (Environmental, Social, and Governance) investing. This approach to investment has gained prominence not only in the West but has also spread to Asia and, more recently, gained fame in India.
Ethical investing is a strategy that relies on the principles, morals, religion, and social values of the investor. It involves avoiding companies that conflict with the investor's beliefs and values. Essentially, ethical investing is subjective, as it depends entirely on the client or investor's ideology. What one investor deems ethical, another may find objectionable, making it a highly individualized approach.
In India, the concept of ethical investing has been around for at least a decade but has only recently gained significant traction. Several factors have contributed to this surge, including global trends, the impact of the COVID-19 pandemic, increased awareness through social media, and a wider range of sectors available for ethical investments. Both the NSE and BSE have designed indices to cater to investors who prioritize ethical considerations. Notable indices include NIFTY ESG, NIFTY ENHANCED ESG, and NIFTY SHARIAH.
In Europe, ethical investing, sustainable investment, and ESG have gained fame as companies have increasingly embraced environmentally friendly practices and aimed to reduce their carbon footprints. The Paris Agreement set the global goal of limiting temperature rise to 1.5 degrees Celsius, further emphasizing the importance of criteria like ESG compliance in filtering companies for investment.
Consider an economy with approximately 6000 publicly listed companies. Filtering these companies for investment can be a daunting task. However, by applying criteria such as ESG compliance and carbon footprint reduction, you can narrow down the selection to a more manageable number, say 800. To further refine the choices, market capitalization criteria can be employed, resulting in a selection of just 500 companies. This focused approach simplifies the investment decision-making process.
The scope of ethical investing has expanded to encompass various trends, including:
Impact Investing: This approach aims to generate both social or environmental impact and financial returns. Impact investors support companies, funds, or projects working to address global issues like climate change, poverty, and inequality.
Thematic Investing: Investors focus on specific social or environmental themes, such as technology to combat climate change or promoting diversity and inclusion in the workplace.
Sustainable Investing: A broader term that encompasses ethical investing, impact investing, and thematic investing, with the belief that businesses can be profitable and sustainable simultaneously.
Statistical data reflects the growing prominence of ethical investing. Global funds raised in the ESG domain surged from $29 billion to $92 billion between 2020 and 2022. It is projected that the global fund size will reach $33.9 trillion by 2026, constituting 21.5% of the total global assets under management (AuM). Europe plays a significant role in ethical investing, with a combined capacity of Euro 1.7 trillion expected to grow to Euro 3.4 trillion by 2026.
In India, ethical investing has also seen remarkable growth, with a size of approximately Rs 80,000 crore (approximately $10 billion) in 2023, compared to Rs 20,000 crore in 2021. This growth is attributed to segments in both public and private markets, with Rs 60,000 crore and Rs 20,000 crore, respectively.
Ethical investing is experiencing rapid growth across major economies, driven by global agreements like the Paris Agreement and an evolving investment psychology. While some economies implement ethical investing better than others, the future holds the promise of larger investment fund sizes that can contribute to making the world a better place while accommodating diverse investor needs and supporting environmental, ideological, and religious perspectives. Ethical investing is not just a trend; it's a movement towards a more responsible and sustainable financial landscape.
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