While all investors aim to maximise gains, the concept of socially responsible investing (SRI) is gaining currency as people become aware of their responsibility towards society.
What is SRI?
This implies investing in such companies that meet certain minimum standards of social and environmental responsibility, thus seeking to become better and more responsible corporate citizens. This philosophy considers environmental, social and corporate government (ESG) criteria not only to generate competitive financial returns but also positive societal impact. This investing style is known by various names, such as green investing, impact investing, ethical investing, impact investing, sustainable investing, value-based investing.
According to a recent report, as of 2013-end, one out of every six dollars in the US was invested according to socially responsible investing strategies. Accordingly, investors look for strong finance performance but, at the same time, wish to ensure that these investments are used to contribute to the advancements in social, environmental and governance practices. In fact, by following SRI strategies, one can manage risk and also get good returns. A growing body of academic research, both in developed and developing economies, shows a strong linkage between environmental, social and corporate governance (ESG).
SRI strategies
Generally, investors focus on environmental, community and other societal and corporate governance criteria in investment analysis and portfolio construction across the range of asset classes. Investment in industries, such as tobacco, pharmaceutical sector (wherein animal testing is carried out), nuclear power generation, military contracting, etc. is avoided.
Avenues in India
In India, for investors who wish to invest in the SRI theme, readily available investment opportunities in terms of mutual fund or exchange-traded funds are limited. However in January 2008, Crisil came up with an index to measure environmental, social and corporate governance practices. A composite score is computed for each company by summing its qualitative and the quantitative score. The objective of the index is to raise the profile of those companies that perform well on these parameters. To ensure investability, liquidity is used as a secondary threshold in the selection of index constituents.
Index constituents are drawn from the top-500 companies by market capitalisation listed on the NSE, which are subjected to a screening and selection process, which leads to a score based on a company’s ESG-disclosure-related practices in the public domain. Similarly, Bloomberg also computes ESC disclosure scores for all listed firms across the globe. The performance on ESG parameters assures investors that their portfolio is consciously balancing the interests of all stakeholders, and thereby, provides a platform for strong long-term performance.
Sustainable investing strategies work together to encourage responsible business practices and allocate capital for social and environmental benefits. ESG performance data could be used along with traditional financial information, allowing investors to more easily integrate ESG factors into their fundamental analysis. ESG factors can be a business risk, both in the short and medium-to-long run. By following SRI principles, investors have an opportunity to achieve good returns and, at the same time, indirectly contribute to the environment.
Socially speaking
* Crisil has come up with an index to measure environmental and social governance practices
* Bloomberg also computes disclosure scores for all listed firms across the globe
The writer is associate professor of finance & accounting, IIM Shillong