Sustainability and Stocks: Towards a truly "Green" Portfolio
It’s been quite a week, hasn’t it? Election results and its impact on the stock market have hogged the news prime time. But amidst this, something interesting caught my eye - National Stock Exchange launched India's first EV and New Age Automotive Index. Agreed, this news is not as exciting as the ones making the rounds right now, but this is surely an important one to mull upon. Afterall, this moves affirms that the intersection of sustainability and stock markets is getting stronger in India.
The global rise of Socially Responsible Investing (SRI) as well as an interest in sustainability and renewable energy affiliated stocks is not merely a trend but a reflection of the future. The Global Energy Perspective 2023 models the outlook for demand and supply of energy commodities across a 1.5°C pathway, aligned with the Paris Agreement. It projects that the share of renewables in the global power mix could more than double in the next 20 years.
Rise of SRI Globally
Traditional investing is all about the numbers. Investors focus on financial metrics like profitability and revenue growth to maximize returns. They assess risks such as market fluctuations, creditworthiness, and operational issues, and spread their investments across various sectors and asset classes to cushion against potential losses.
On the other hand, Socially Responsible Investing (SRI) adds a layer of ethical consideration to the mix. It integrates Environmental, Social, and Governance (ESG) criteria into investment decisions. This means looking at how companies impact the environment, such as their carbon footprint and energy efficiency. Social factors come into play by evaluating how companies treat their employees, uphold human rights, and engage with communities. Governance factors scrutinize leadership practices, executive pay, and how well shareholder rights are protected.
By considering these ESG criteria, SRI aims to support companies that are not only financially sound but also ethically responsible and sustainable in the long run. This holistic approach helps investors align their portfolios with their values while still aiming for competitive financial returns, and it is working for them. For instance, 11 of the 21 Morningstar standard sustainability indexes outperformed their broader market benchmarks during the first quarter of 2023.
The MSCI KLD 400 Social Index, one of the first socially responsible investing (SRI) indices, has shown competitive returns compared to traditional indices.
Similarly, many such indices like the FTSE4Good Index Series, the Euronext Vigeo Eiris, the S&P 500 ESG Index, ensures that investors can remain committed to sustainable practices while maintaining a diversified portfolio.
India's Progress towards a Sustainable Stock Market
The Nifty EV & New Age Automotive Index which aims to track the performance of companies which form a part of the EV ecosystem or are involved in the development of new-age automotive vehicles or related technology, is a step in the right direction. This development underscores the growing emphasis on sustainability and clean energy in the Indian stock market. India needs more of such indices for the following reasons:
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Up till now, India has ventured into SRI through sustainability oriented Mutual Funds. The first ESG fund in India, the SBI Magnum Equity ESG Fund was introduced in May 2018. Ever since then, the ESG theme has gained momentum, particularly in the wake of the COVID-19 pandemic. Between 2020 and 2021, the market witnessed the launch of eight new ESG funds, reflecting a growing interest in responsible investing. As of Jan 2024, there were 10 ESG schemes managing assets worth Rs 10,946 crore across various fund houses in India.
Despite the potential benefits of ESG investing, retail investor demand remains relatively low due to perceived lower returns compared to traditional funds and limited awareness. Yet, experts remain optimistic about the future of such funds, citing increasing concerns about environmental and social issues and regulatory initiatives aimed at promoting SRI in India.
Another interesting aspect that Indian stock market is actively exploring is
. The first of its kind initiative in India, SSE offers a unique opportunity for Social Enterprises, including Non-profit Organizations and For-profit Enterprises involved in eligible activities, to register and raise funds on a recognized exchange platform. In fact, 5 organizations have already managed to raise INR 80 million with five more firms awaiting listing.
Way Forward
In order to further promote SRI and enhance investor confidence, regulatory bodies like the Securities and Exchange Board of India (SEBI) are taking steps to provide clearer guidelines and disclosures around sustainable investing. SEBI's initiatives, including allowing asset management companies to launch multiple ESG schemes with different sub-strategies (shown below), aim to foster the growth of the ESG segment and align with global trends in sustainable finance
While the future of ESG investing looks promising, the long-term performance of these funds remains to be seen given the lack of performance data. However, sustainability oriented indices just like the EV Index recently launched, can help investors and portfolio managers benchmark performance and create new ESG investment products around it.
So, whether you're a Dalal Street pro or just starting out, let's make sustainability the star of our investment show. After all, green isn't just the color of money—it's the color of our planet, too.
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Energy Enthusiast
5 个月Great info!??