Wealth creation is a pursuit that has been passed down through generations. But our elders did not have to reckon with the long shadow cast by climate change. For millennials and Gen Z, financial security for our future generations can no longer be divorced from protecting the future of the planet we call home. We need to leave behind not just the proverbial pot of gold but also a habitable earth.
Conscious consumerism is shaping our lives, and now it is time for our investments to follow suit. This is sustainable investing, the new frontier of wealth management.
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A 2024 “Sustainable Signals” report by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Wealth Management found more than three-quarters of retail investors globally are interested in companies or funds that balance market-rate financial returns with positive social and/or environmental impact, with over half of the surveyed planning to increase their sustainable investments in the next year.
Of course, the tenets of smart investing we employ to invest regularly apply to a sustainable portfolio as well. We still need to start early to leverage compounding, diversify across asset classes to minimise risk, and invest for both short- and long-term goals such as retirement. Any investments, including sustainable instruments, must be done after analysing our risk tolerance and must be adjusted regularly to ensure steady wealth-building.
For most of us, sustainable investing may appear complex. But think of it as the modern blue-chip investment. Blue-chip companies have always prioritised good corporate governance and stakeholder wellbeing besides commercial success, and retail investors have backed them with their wallets for such best practices. Building a sustainably responsible portfolio is nothing but looking at our parked money through the lens of its environmental, social, and governance (ESG) effects. Governments around the world, and the conscious investor are taking this approach as it promotes a better world by mitigating non-financial risks for businesses.
While corporate leadership steers their businesses to follow best practices in ESG for shoring up sustainable action, the individual can look to sustainable investing. Businesses engage in sustainable marketing, CSR activities and ESG practices. We can either channel investments to push corporations towards practising values aligned with a better future such as environmental responsibility, known as activist investing, or we can invest for good by choosing funds or companies that address social and environmental causes we believe in, known as impact investing. The third option is a bit of both!
If directly buying stocks, we would need to focus on the company’s practices that contribute positively to the environment, society, and governance. For mutual funds, there are several ways to shore up our sustainability quotient.
There are the best-in-class ESG funds, which invest in stocks that have the best ESG ratings, the theme funds focussing on sustainability themes such as climate action (urgently mitigating climate risks) circular economy (minimising waste and maximising resource use) and clean energy solutions (balancing profit with environmental benefits), water conservation, diversity and inclusion. Impact mutual funds are those that invest in companies that are directly pledged to improve the plight of society, the environment and in turn, the world.
Responsible passive income instruments include funds tracking the ESG indices, available on BSE and NSE. The goal would be to back funds that align with companies adding value to improving the world. ESG assets are expected to reach $53 trillion by 2025 globally, over a third of the $140.5 trillion in projected total assets under management.
Debt instruments like bonds let us home in on specific environment-friendly projects. For example, the green bonds floated by the urban local bodies in Indian cities are a great way to channel funds to the first responders to climate change damage while earning handsome returns. Some of them tackle waste management, others clean transport and so on. Company bonds linked to ESG performance are a direct way to make our support for a greener planet.
We can get started as easily as just a search on an investment platform for ESG funds. Automated investment services too can adjust our portfolio allocation within sustainable investment parameters. Sophisticated tech investment platforms can tailor solutions by matching sustainability goals that are the need of the hour with our personal objectives, creating effective portfolios.
The thumb rule of diversifying used in traditional investing applies to sustainable portfolios, ensuring that we don’t depend on one sector alone. Similarly, building a base of sustainable ESG-compliant companies to invest in, and incrementally adding new-age, impact-based but riskier options would give us a comprehensive portfolio that makes a difference to the world.
We must remember to avoid greenwashing traps by going beyond labels. A closer look at the holdings of the funds we choose should tell us if unworthy companies such as oil stocks or fossil-fuel energy stocks are part of the bouquet. The fund manager’s engagement with the companies they invest in for monitoring them on their proposed targets can go a long way in separating the chaff from the grain.
Sustainable investing brings us a double win: We get to be the architects of a positive change for our world and earn financial rewards on our way.Statistics show that for more than 20 years, ESG-strong companies have been more resilient in the face of volatility and grown faster, outperforming the market in returns over the long term.
In India, sustainable investing is being fuelled by three key factors: Regulations pushing for transparency; growing investor demand for environmental and social impact, and the recognition by businesses that strong ESG practices are good for the bottom line as they improve efficiency, reduce risk (climate and regulatory), attract capital from responsible investors, win customer loyalty, and bestow a competitive edge in the market. As a result, Indian companies are sprucing up their ESG disclosures and rating agencies lining up robust frameworks for evaluating and ranking companies on ESG performance.
There is a spectrum of responsible instruments to increase our financial capital. The sooner we delve into sustainable investing, the quicker we will be able to identify the mix best for us. After all, sustainable investment is not just about making money. It is about making a positive difference and ensuring a better future for everyone. By being thoughtful in our investments, we are contributing to a world where finance and sustainability go hand in hand.
Akhil Modi, CA, Director – Product & Platforms, BlinkX by JM Financial.